Kuwait Rules and Regulations (Level 3)

Correct: The correct approach recognizes the distinct functional jurisdictions within the Kuwaiti financial system. The Central Bank of Kuwait (CBK), established under Law No. 32 of 1968, maintains primary oversight over the banking sector and systemic AML/CFT stability, while the Capital Markets Authority (CMA), established by Law No. 7 of 2010, is the specialized regulator for all securities-related activities, including investment funds and brokerage. A US-based wealth manager operating in Kuwait must maintain a compliance framework that maps specific activities to the correct regulator to ensure that securities-specific disclosure and beneficial ownership requirements under CMA bylaws are not overlooked in favor of more general banking circulars.

Incorrect: The approach of consolidating all oversight under the Ministry of Commerce and Industry (MOCI) is incorrect because while the MOCI handles general commercial licensing and company formation, it does not possess functional regulatory authority over specialized financial services like banking or securities trading. The approach of prioritizing Central Bank of Kuwait (CBK) directives for all activities fails to account for the legal autonomy of the Capital Markets Authority (CMA), which has exclusive jurisdiction over securities markets; following only CBK rules would leave the firm in violation of CMA Law No. 7 of 2010. The approach of substituting US SEC standards for local Kuwaiti requirements is a regulatory failure, as compliance with US federal law does not exempt a firm from the specific licensing, reporting, and conduct-of-business mandates issued by Kuwaiti authorities for operations within their sovereign jurisdiction.

Takeaway: Compliance in Kuwait requires a bifurcated approach that distinguishes between the Central Bank’s authority over banking and the Capital Markets Authority’s specialized jurisdiction over securities and investment activities.

Correct: Under the Investment Company Act of 1940, specifically Section 5(b)(1), a ‘diversified’ fund must adhere to the 75-5-10 rule, meaning that for at least 75% of the fund’s total assets, no more than 5% can be invested in any one issuer. While Section 13(a) allows for ‘passive’ breaches (where a position grows beyond limits solely due to market appreciation), any ‘active’ purchase of securities while a position is above the regulatory or prospectus-stated limit constitutes a compliance violation. The most appropriate action is to immediately cease further purchases of the security to prevent exacerbating the active breach and to implement a structured rebalancing plan to return the portfolio to its diversified status as defined in its registration statement.

Incorrect: The approach of relying on passive appreciation exceptions is incorrect because the scenario involves an active purchase, which invalidates the protection afforded to purely market-driven movements. The approach of retroactively reclassifying the fund from ‘diversified’ to ‘non-diversified’ is a violation of Section 13(a) of the Investment Company Act, which requires a shareholder vote to change a fund’s fundamental investment policy regarding diversification. The approach of using synthetic derivatives to hedge the economic exposure does not resolve the regulatory breach, as concentration limits apply to the underlying physical holdings and the gross exposure of the investment company’s assets.

Takeaway: Active purchases that cause or occur during a breach of diversification limits under the Investment Company Act of 1940 are regulatory violations that cannot be excused by subsequent market appreciation.

Correct: Under SEC Regulation S-K Item 404 and NASDAQ Listing Rule 5605, companies are required to disclose related-party transactions where an executive officer or director has a direct or indirect material interest. Furthermore, exchange listing standards require that an independent body of the board, typically the audit committee, must review and oversee such transactions to ensure they are conducted on an arm’s-length basis and do not violate corporate governance principles. This dual requirement of independent oversight and public transparency is a cornerstone of the US listing process.

Incorrect: The approach of requiring the CEO to divest their interest to avoid disclosure is incorrect because SEC rules require disclosure of related-party transactions that occurred during the fiscal years for which financial statements are required in the registration statement, meaning a mid-process divestiture does not eliminate the reporting obligation. The approach of reclassifying the supplier as a non-related party based on the passive nature of the investment fails because the ‘indirect material interest’ standard in Regulation S-K is broad and typically encompasses significant stakes held through investment vehicles like venture capital funds. The approach of seeking a non-action letter for immateriality is flawed because the SEC’s disclosure thresholds for related-party transactions are prescriptive, and the agency does not typically grant relief for transactions involving the CEO’s financial interests simply because they are indirect.

Takeaway: US listing requirements necessitate both the structural independence of the audit committee to oversee conflicts and the transparent disclosure of related-party transactions in SEC filings.

Correct: Under the Investment Company Act of 1940, specifically Section 30 and Rule 30e-1, registered investment companies are required to transmit reports to shareholders at least semi-annually. These reports must be filed with the Securities and Exchange Commission (SEC) on Form N-CSR no later than 10 days after the transmission to stockholders. The correct remediation involves immediate corrective filing to restore transparency, direct communication to the affected investors to fulfill the fiduciary duty of disclosure, and the implementation of systemic controls (like redundant calendars) to ensure future compliance with federal securities laws.

Incorrect: The approach of consolidating missing data into the next annual report is insufficient because federal regulations require distinct periodic filings; skipping a semi-annual disclosure creates a permanent gap in the regulatory record and violates the mandated reporting frequency. Relying on a secure member website for disclosure without adhering to the specific ‘notice and access’ requirements of SEC Rule 30e-3 fails to meet the legal standard for ‘furnishing’ reports to shareholders. Suspending the capital raise and waiting for an SEC deficiency letter is a reactive and potentially damaging strategy that fails to proactively address the compliance breach, which could lead to more severe enforcement actions or loss of the fund’s ‘well-known seasoned issuer’ status if applicable.

Takeaway: Registered investment funds must strictly adhere to the periodic reporting timelines mandated by the Investment Company Act of 1940 to maintain regulatory standing and fulfill disclosure obligations to shareholders.

Correct: Under SEC Rule 15c3-1 (the Net Capital Rule) and the notification requirements of SEC Rule 17a-11, a broker-dealer must maintain a minimum level of net capital to ensure it can meet its financial obligations to customers and creditors. If a firm’s net capital falls below the minimum required level, or even below ‘early warning’ thresholds, it must provide immediate electronic notice to the SEC and its Designated Examining Authority (FINRA). The most appropriate professional response involves immediate transparency with regulators, the activation of pre-approved capital contingency plans—such as securing subordinated loans that meet the requirements of Appendix D of Rule 15c3-1—and the cessation of any activities that further deplete capital, such as dividends or unsecured lending, until compliance is restored.

Incorrect: The approach of utilizing a temporary business continuity waiver to delay reporting is incorrect because the SEC does not grant automatic grace periods for net capital deficiencies; reporting under Rule 17a-11 is a ‘same-day’ requirement regardless of operational disruptions. The approach of reclassifying illiquid technology assets as allowable assets is a violation of the Net Capital Rule, which requires the deduction of most non-marketable or intangible assets to ensure the capital remains truly liquid. The approach of using funds from the Special Reserve Bank Account to offset a capital deficiency is a fundamental violation of SEC Rule 15c3-3 (the Customer Protection Rule), which strictly prohibits the use of customer-segregated funds to satisfy the firm’s own regulatory capital obligations.

Takeaway: Broker-dealers must provide immediate notification to the SEC and FINRA upon a net capital deficiency and cannot use business continuity or customer reserve funds to bypass or delay these strict liquidity requirements.

Correct: Under the Kuwait Capital Markets Authority (CMA) Executive Bylaws, specifically Module 10 (Disclosure and Transparency), issuers listed on Boursa Kuwait are required to disclose material information to both the CMA and the exchange immediately upon the occurrence of the event. This requirement is strictly enforced for the Premier Market to ensure high levels of transparency. Furthermore, if material information is leaked or its confidentiality is breached before a formal disclosure is made, the issuer is legally obligated to issue an immediate clarifying announcement to the market to prevent information asymmetry and maintain market integrity.

Incorrect: The approach of permitting a delay in disclosure until the end of the trading session is incorrect because Kuwaiti regulatory standards prioritize real-time transparency to ensure all market participants have simultaneous access to price-sensitive information. The approach of applying a fixed 5% price movement threshold as the sole trigger for materiality is incorrect, as the CMA defines materiality based on whether the information would likely influence the decisions of a reasonable investor, regardless of a specific numerical price change. The approach of limiting mandatory disclosures to structural changes like mergers or board appointments is wrong because the regulatory definition of material information is broad, encompassing any operational, financial, or legal development that could significantly impact the issuer’s position or share price.

Takeaway: Issuers on the Kuwait Stock Exchange must provide immediate disclosure of material information and are required to issue an immediate public announcement if such information is leaked prior to the official filing.

Correct: In the context of cross-border financial operations involving Kuwait, a US-based professional must recognize that the Capital Markets Authority (CMA) is the primary regulator for securities, investment funds, and licensed activities under Law No. 7 of 2010. While the Central Bank of Kuwait (CBK) oversees the banking sector, the CMA maintains the specific registry and oversight for investment entities. Verifying the entity’s status through the CMA portal ensures that the US bank is not facilitating transactions for an unlicensed or improperly authorized entity, which is a critical component of both US AML/KYC standards and Kuwaiti regulatory compliance. Furthermore, aligning OFAC screening with local Kuwaiti requirements ensures that the bank addresses both US federal law and the specific jurisdictional risks associated with the Kuwaiti financial framework.

Incorrect: The approach of relying on the Central Bank of Kuwait (CBK) as the primary licensing authority for investment funds is incorrect because the CBK’s mandate is focused on the banking system and monetary policy, whereas the CMA is the dedicated regulator for securities and investment schemes. The approach of using the Ministry of Commerce and Industry (MOCI) commercial registry as the definitive source for financial licensing is flawed because MOCI handles general corporate registration, but specific financial services licenses must be granted and verified by the CMA. The approach of accepting self-certification based on Kuwait Chamber of Commerce membership is insufficient because such membership is a general business requirement and does not constitute a regulatory license to perform financial services or manage investment funds.

Takeaway: When dealing with Kuwaiti investment entities, US compliance professionals must distinguish between the banking oversight of the Central Bank of Kuwait and the securities oversight of the Capital Markets Authority (CMA).

Correct: The Central Bank of Kuwait (CBK) is established as the primary monetary authority with the mandate to issue the national currency (the Kuwaiti Dinar), ensure its stability and convertibility, and direct credit policy to support social and economic progress. Under the regulatory framework, the CBK holds the exclusive power to supervise the banking system, including commercial and specialized banks, to ensure financial stability and compliance with prudential standards such as liquidity and capital adequacy ratios.

Incorrect: The approach of overseeing the securities industry, stock exchange listings, and public fund disclosures describes the role of the Capital Markets Authority (CMA), which is a separate regulatory body from the CBK. The approach of managing commercial company registrations and trade licenses for non-financial entities is the responsibility of the Ministry of Commerce and Industry. The approach of acting as a private sector intermediary for investment insurance or commodity clearing misrepresents the public nature of a central bank, which focuses on systemic stability rather than providing commercial insurance products or managing private commodity markets.

Takeaway: The Central Bank of Kuwait is primarily responsible for monetary policy, currency stability, and the supervision of the banking sector, distinct from the Capital Markets Authority’s oversight of securities.

Correct: Under the FinCEN Customer Due Diligence (CDD) Rule and the Bank Secrecy Act (BSA), financial institutions are required to maintain an ongoing understanding of the customer relationship. This includes identifying and verifying the beneficial owners of legal entity customers at the time of account opening and when information changes during the course of the relationship. When a firm becomes aware of information that may affect the risk profile of an account—such as a whistleblower report or a change in corporate structure—it must update the CDD information. For Senior Foreign Political Figures (PEPs), the firm must perform Enhanced Due Diligence (EDD) to mitigate risks related to money laundering and corruption, which specifically involves re-validating the source of wealth and source of funds when significant external events occur.

Incorrect: The approach of relying on third-party attestations and manual updates is insufficient because the firm retains the ultimate regulatory responsibility for customer verification and cannot outsource its compliance obligations without active oversight and independent testing. The approach of immediately filing Suspicious Activity Reports (SARs) and freezing assets is premature; while the gaps are serious, SARs should be filed based on suspicious transactions or patterns rather than administrative CDD deficiencies alone, and freezing assets without a legal basis or specific evidence of a crime can lead to significant legal liability. The approach focusing on record-keeping audits and training is a secondary corrective action that fails to address the immediate risk of maintaining accounts with unverified beneficial owners and unvalidated high-risk profiles.

Takeaway: Financial institutions must proactively update beneficial ownership information and perform enhanced due diligence on high-risk clients whenever a change in circumstances or a periodic review indicates that existing data is no longer accurate or sufficient.

Correct: Under SEC Rule 30b1-9 and the Investment Company Act of 1940, investment companies are required to file accurate reports on Form N-PORT. When a registrant discovers that a previously filed report contains materially inaccurate information, they are obligated to file an amendment to that specific report promptly. The approach of filing amended reports for the affected periods while documenting the technical root cause and remediation steps demonstrates a commitment to regulatory transparency and data integrity, which are core expectations of the SEC’s monitoring framework.

Incorrect: The approach of including missing historical data as a cumulative adjustment in the current filing is incorrect because regulatory reporting requires period-specific accuracy; bundling past errors into a new report obscures the historical record and violates the specific instructions for Form N-PORT. The approach of prioritizing the current filing while delaying the correction of past reports until an annual audit fails to meet the requirement for timely disclosure of material inaccuracies once they are identified. The approach of requesting a regulatory waiver due to technical glitches is generally inappropriate, as the SEC maintains that the responsibility for accurate and timely reporting rests solely with the registrant, regardless of software failures or system migration challenges.

Takeaway: Material inaccuracies in regulatory filings must be corrected through formal amendments for each specific affected period as soon as the error is identified to maintain the integrity of the regulatory record.

Correct: Under SEC Rule 10A-3 and the listing standards of major U.S. exchanges like NASDAQ and the NYSE, the audit committee must be composed entirely of independent directors. These directors must meet heightened independence standards, meaning they cannot be affiliated with the company (other than in their capacity as a board member) and cannot accept any compensatory fees from the company. This is a critical qualitative listing requirement designed to ensure objective oversight of the financial reporting process and the internal audit function.

Incorrect: The approach of allowing the CEO to chair the compensation committee is incorrect because exchange listing rules require the compensation committee to be composed of independent directors to mitigate conflicts of interest regarding executive pay. The approach of claiming Foreign Private Issuer status to bypass governance rules is invalid in this scenario because the company is incorporated in Delaware and has the majority of its assets in the U.S., failing the SEC’s ‘foreign’ test. The approach of using the ‘controlled company’ exemption for the audit committee is a significant regulatory misunderstanding; while controlled companies (where more than 50% of voting power is held by an individual or group) are exempt from having independent nominating and compensation committees, they are strictly prohibited from bypassing the independent audit committee requirements mandated by the Securities Exchange Act of 1934.

Takeaway: While certain governance exemptions exist for controlled companies or foreign issuers, the requirement for a fully independent audit committee is a mandatory, non-waivable listing standard for all companies on U.S. national exchanges.

Correct: Under the FinCEN Customer Due Diligence (CDD) Rule (31 CFR § 1010.230) and the Bank Secrecy Act (BSA), financial institutions are required to identify and verify the identity of beneficial owners of legal entity customers. While a ‘reliance agreement’ allows one financial institution to rely on the CDD performed by another, the relying institution must have a reasonable basis to believe the other party is performing its obligations. Once a whistleblower report indicates a specific failure—especially involving a Politically Exposed Person (PEP)—the institution can no longer reasonably rely on that third party’s work for that client. The institution must perform its own Enhanced Due Diligence (EDD), including verifying the source of wealth and the identity of the beneficial owner, and must re-evaluate the systemic integrity of the reliance agreement itself.

Incorrect: The approach of requesting a formal attestation from the partner bank is insufficient because a mere certification does not satisfy the requirement to perform independent verification once a specific red flag or deficiency has been identified. The approach of filing a Suspicious Activity Report and freezing assets immediately is premature; while a SAR may eventually be necessary, the immediate regulatory obligation is to complete the due diligence process and verify the facts before taking such drastic enforcement actions. The approach of conducting a sample-based audit of other accounts while leaving the current account under standard monitoring fails to address the immediate compliance breach regarding the specific high-risk PEP identified in the report, thereby exposing the firm to significant regulatory sanctions for inadequate EDD.

Takeaway: When a reliance agreement is compromised by specific evidence of due diligence failure, the institution must immediately perform independent verification and Enhanced Due Diligence rather than continuing to rely on the third party’s representations.

Correct: In the United States, Sukuk are treated as securities and must comply with the Securities Act of 1933. A critical regulatory requirement for asset-backed securities, including Sukuk, is the ‘true sale’ of assets to a Special Purpose Vehicle (SPV) to ensure they are bankruptcy-remote from the originator. Furthermore, to avoid the Shari’ah Supervisory Board being classified as an investment adviser under the Investment Advisers Act of 1940, their role must be clearly disclosed as consultative and non-discretionary. Providing a formal legal opinion on the SPV structure and ensuring transparent disclosure of the board’s role and fees are essential steps to satisfy SEC transparency requirements and federal fiduciary standards.

Incorrect: The approach of reclassifying the Sukuk as unsecured debt to bypass ‘true sale’ requirements is incorrect because it misrepresents the legal and economic reality of the instrument, which could lead to charges of securities fraud or material misrepresentation under SEC Rule 10b-5. The approach of requiring the Shari’ah board to register as an Investment Adviser is a misunderstanding of their function; their role is to certify religious compliance, not to manage assets or provide investment advice, and forcing registration would be an unnecessary and likely inapplicable regulatory burden. The approach of relying on a de minimis threshold to avoid due diligence fails because US regulators, including the NCUA and SEC, require rigorous risk assessment and accurate disclosure for all securities holdings, regardless of the percentage of the portfolio they represent.

Takeaway: Under US securities law, Sukuk must be supported by a ‘true sale’ legal opinion to ensure bankruptcy remoteness and must include clear disclosures regarding the Shari’ah board’s non-discretionary role to comply with the Investment Advisers Act.

Correct: In the United States, the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission (SEC) require that while financial institutions may offer Shariah-compliant products, they must maintain the same safety, soundness, and fiduciary standards as traditional products. Under OCC Interpretive Letters 867 and 928, structures like Murabaha are permitted as functional equivalents to lending, but the bank’s board of directors and senior management cannot abdicate their legal and fiduciary responsibilities to an external religious body. Therefore, the Shariah Supervisory Board must act in a consultative or advisory capacity, ensuring that the firm’s management retains ultimate control over risk management, operational decisions, and legal compliance.

Incorrect: The approach of granting the Shariah Supervisory Board formal executive authority to approve or block transactions is incorrect because U.S. regulators require the institution’s management to maintain exclusive control over risk-taking activities and fiduciary obligations. The approach of implementing a ‘religious exemption’ for corporate governance or data privacy protocols fails because all financial activities within a U.S.-regulated institution must adhere to federal laws, including the Gramm-Leach-Bliley Act and standard oversight requirements, regardless of the product’s religious nature. The approach of reclassifying Shariah-compliant products as ‘private contracts’ to bypass regulatory oversight is a violation of the National Bank Act and the Securities Exchange Act, as the economic substance of the transaction determines its regulatory treatment, not its religious label.

Takeaway: U.S. financial institutions must ensure that Shariah governance frameworks remain advisory in nature, with ultimate fiduciary and legal responsibility residing strictly with the firm’s management and board of directors.

Correct: In the United States, while financial institutions are permitted to offer Shariah-compliant products under various OCC Interpretive Letters (such as 867 and 928), the bank’s Board of Directors and senior management maintain ultimate legal and fiduciary responsibility for the institution’s operations. Shariah governance must be integrated into the bank’s existing Enterprise Risk Management (ERM) framework. This means that while a Shariah Supervisory Board provides religious expertise, their directives must be vetted by the bank’s legal and compliance functions to ensure they do not conflict with federal laws such as the Truth in Lending Act (TILA), the Dodd-Frank Act, or OCC safety and soundness standards. The bank cannot delegate its regulatory accountability to an external religious body.

Incorrect: The approach of adopting religious directives as a safe harbor from US banking rules is incorrect because US regulators do not recognize religious standards as a valid reason to deviate from federal accounting, reporting, or consumer protection laws. The approach of treating Shariah governance as a marketing function is a failure of risk management, as Shariah non-compliance constitutes a significant operational and reputational risk that can lead to breach of contract and loss of the target market. The approach of allowing immediate implementation of directives followed by a delayed third-party audit fails to provide the necessary preventative controls required to ensure that the bank remains in compliance with US regulatory requirements at all times.

Takeaway: In US Islamic finance, Shariah governance serves as a specialized risk management layer that must remain subordinate to the bank’s ultimate legal and regulatory obligations under federal law.

Correct: Under the Investment Advisers Act of 1940 and the fiduciary standards enforced by the SEC, investment advisers must provide full and fair disclosure of all material facts, including conflicts of interest that could affect the impartiality of their advice. Form ADV Part 2A is the primary regulatory document used to disclose these conflicts to both the regulator and the client. Additionally, FINRA Rule 3270 requires associated persons to provide prior written notice to their firms regarding outside business activities (OBA). In this scenario, because the conflict is material to the specific recommendation being made, the firm must ensure the disclosure is not only in the regulatory filings but also communicated to the clients specifically before they act on the advice to satisfy the ‘informed consent’ aspect of fiduciary duty.

Incorrect: The approach of relying solely on internal logs and general disclosures in a client agreement is insufficient because fiduciary duty requires specific, prominent disclosure of material conflicts that could influence a particular recommendation. The approach of filing a Form CRS amendment within a 90-day window while keeping details confidential fails because Form CRS is a high-level summary and does not replace the detailed disclosure requirements of Form ADV, nor does it satisfy the immediate need for transparency before a client commits capital. The approach of filing a Suspicious Activity Report (SAR) with FinCEN is incorrect as SARs are intended for reporting suspected money laundering, terrorist financing, or other criminal activities, not for the standard disclosure of professional conflicts of interest or outside business activities.

Takeaway: U.S. regulatory standards require that material conflicts of interest be disclosed through formal Form ADV updates and direct client communication prior to the execution of related investment recommendations.

Correct: Under the Bank Secrecy Act (BSA) and implementing regulations such as 31 CFR Part 1020, financial institutions in the United States must maintain Customer Identification Program (CIP) records for at least five years and ensure they are readily accessible for regulatory inspection. SEC Rule 17a-4 and FINRA Rule 4511 further clarify that records must be preserved in a non-rewriteable, non-erasable (WORM) format and be produced promptly upon request. A 72-hour delay for basic metadata retrieval does not meet the standard of being ‘readily accessible.’ Therefore, re-indexing the data and updating Written Supervisory Procedures (WSPs) to include periodic retrieval testing is the only approach that ensures both technical compliance and ongoing supervisory effectiveness.

Incorrect: The approach of maintaining a 72-hour manual restoration process fails because it violates the regulatory requirement that records be readily accessible; significant delays in producing basic CIP data during an audit are frequently cited as record-keeping violations by the SEC and FINRA. The approach of focusing remediation efforts only on Suspicious Activity Reports (SARs) and high-risk files is legally insufficient, as the BSA mandates the retention and accessibility of all customer identification and verification data for the duration of the account and five years thereafter, regardless of the risk tier. The approach of relying on a third-party service level agreement (SLA) to manage data availability is incorrect because regulatory obligations for compliance and record production cannot be delegated or transferred to a vendor; the financial institution remains solely responsible for ensuring its records meet accessibility standards.

Takeaway: U.S. AML record-keeping regulations require that all mandated documentation, including CIP and transaction data, remain readily accessible and retrievable for at least five years to satisfy Bank Secrecy Act and SEC/FINRA requirements.

Correct: Under the Bank Secrecy Act (BSA) and the FinCEN Customer Due Diligence (CDD) Rule (31 CFR 1010.230), covered financial institutions are required to maintain a record of all identifying information obtained for beneficial owners (including name, address, date of birth, and Social Security number or other government ID) for a period of five years after the account is closed. Furthermore, the institution must maintain a description of any document relied on for verification, a description of the methods and results of any measures undertaken to verify identity, and the resolution of any substantive discrepancies for five years after the record is made. This dual-timeline retention strategy ensures that the core identity data remains available for the duration of the relationship and a reasonable period thereafter, while verification process records are kept for a fixed period from their creation.

Incorrect: The approach of retaining records for seven years following the end of the calendar year is incorrect because it aligns with general Internal Revenue Service (IRS) tax audit standards rather than the specific five-year mandate established by the Bank Secrecy Act for anti-money laundering compliance. The approach of archiving records for a minimum of three years from the date of the last transaction is insufficient; while this might satisfy certain record-keeping requirements under SEC Rule 17a-4 for broker-dealers, it fails to meet the more stringent five-year post-closure requirement imposed on banking institutions by FinCEN for beneficial ownership data. The approach of storing assessment logs for ten years based on the statute of limitations for federal crimes is not a regulatory requirement under current banking law and represents an excessive administrative burden that goes beyond the standard compliance obligations for record retention.

Takeaway: Federal banking regulations require that beneficial ownership identifying information be retained for five years after account closure, while verification process records must be kept for five years from the date they are created.

Correct: Under Kuwaiti Law No. 7 of 2010 and the Executive Bylaws issued by the Capital Markets Authority (CMA), any person or entity that reaches a substantial ownership threshold of 5% or more in a company listed on Boursa Kuwait must disclose this holding. Furthermore, any subsequent change in that holding of 0.5% or more must be disclosed immediately to both the CMA and Boursa Kuwait. The Premier Market, as the top-tier segment of the exchange, imposes additional transparency obligations on listed companies, such as the requirement to publish disclosures in both Arabic and English and to hold quarterly analyst conferences, which are essential for international institutional investors to monitor.

Incorrect: The approach of utilizing a ten-day reporting window for ownership changes to the Ministry of Commerce is incorrect because the Ministry is not the primary regulator for securities trading disclosures, and the CMA requires more immediate reporting for substantial holdings. The approach of mandating a Shariah Supervisory Board for all Premier Market listings is incorrect because Shariah governance is only a requirement for companies specifically licensed as Islamic institutions, not a universal requirement for all companies in the Premier segment. The approach of prioritizing reporting to the Central Bank of Kuwait for all equity trades is incorrect because the Central Bank’s primary jurisdiction is limited to the banking sector and monetary policy, whereas the CMA is the statutory body responsible for the regulation of the stock exchange and market participants.

Takeaway: Substantial holding disclosures on Boursa Kuwait require reporting 0.5% incremental changes to the CMA once a 5% threshold is met, with heightened transparency standards for the Premier Market.

Correct: Under the Investment Advisers Act of 1940, any entity that provides discretionary investment management or tailored advice for compensation is generally required to be registered as an Investment Adviser (IA) with the SEC or state authorities. The wealth manager, as a Registered Investment Adviser (RIA), has a non-delegable fiduciary duty to oversee its service providers. If the fintech firm is making discretionary decisions (such as rebalancing accounts without specific per-trade approval), it likely meets the statutory definition of an investment adviser. The RIA must ensure the provider is properly licensed or restructure the relationship so the RIA retains all discretionary authority to avoid aiding and abetting unregistered investment advisory activity.

Incorrect: The approach of amending the Form ADV and implementing weekly reconciliations is insufficient because disclosure and retrospective review do not cure the legal requirement for an entity performing discretionary acts to be registered. The approach of relying on a SOC 2 report and a ‘technology-only’ attestation fails because operational audits do not satisfy the legal and regulatory requirements for professional licensing under federal securities laws. The approach of reclassifying the vendor as a solicitor is incorrect because the solicitor framework (now integrated into the SEC Marketing Rule) pertains to client referrals and lead generation, not the execution of discretionary investment management or portfolio rebalancing.

Takeaway: Wealth managers must verify that outsourced service providers performing core discretionary functions are appropriately registered under the Investment Advisers Act to prevent unauthorized advisory activity.

Correct: The Investment Company Act of 1940, specifically Section 3(c)(1), provides an exemption from registration for funds with no more than 100 beneficial owners. However, the ‘look-through’ provision under Section 3(c)(1)(A) and subsequent SEC interpretations require a fund to count the underlying owners of an investing entity if that entity was formed for the specific purpose of investing in the fund. The approach of conducting a comprehensive look-through analysis and evaluating the ‘specific purpose’ test is the only way to determine the actual count. If the limit is exceeded, transitioning to a Section 3(c)(7) exemption—which allows for an unlimited number of ‘qualified purchasers’ (generally individuals with $5 million or more in investments)—is a standard regulatory path, provided the investor base meets that higher sophistication threshold.

Incorrect: The approach of relying solely on representations and warranties from feeder entities is insufficient when the fund manager has reason to believe those entities were formed specifically to circumvent the 100-owner limit; the SEC expects advisers to look past the record holder in such instances. The approach of immediately registering as an investment company is a disproportionate response that subjects a private fund to the rigorous requirements of a mutual fund (such as board independence and daily liquidity) which are often incompatible with private credit strategies, and it does not resolve the underlying compliance failure regarding the previous exempt status. The approach of re-characterizing retail investors as ‘knowledgeable employees’ is a misapplication of Rule 3c-5, as that rule is strictly reserved for individuals who perform executive or investment-management functions for the fund’s adviser, not for external retail investors in feeder vehicles.

Takeaway: Private funds must apply the ‘look-through’ principle to any investing entity formed for the specific purpose of the investment to ensure they do not exceed the 100-beneficial-owner limit required for the Section 3(c)(1) exemption.

Correct: Under the Interagency Guidance on Third-Party Relationships issued by the Federal Reserve, the OCC, and the FDIC, a banking organization is expected to manage the risks associated with its third-party relationships as if the activity were being handled by the bank itself. The board of directors and senior management retain ultimate accountability for the safety and soundness of the bank. This includes the ‘fourth-party risk’—the risk posed by the third party’s own subcontractors. A robust risk management lifecycle must include due diligence that evaluates the third party’s ability to monitor its own service providers, ensuring that the bank’s data and operations remain protected throughout the entire supply chain.

Incorrect: The approach of delegating compliance monitoring entirely to the third party’s internal audit department is insufficient because the bank cannot outsource its regulatory responsibility; it must perform its own independent verification. The strategy of relying on ‘hold harmless’ or indemnification clauses to limit liability is a legal protection but does not satisfy regulatory requirements for risk management, as regulators hold the bank, not the vendor, responsible for compliance failures. Focusing due diligence exclusively on financial stability and uptime performance is a partial approach that fails to address the critical security and operational risks inherent in cloud environments and subcontractor oversight.

Takeaway: In the United States regulatory framework, a bank can outsource its operational functions but can never outsource its ultimate responsibility for compliance and risk management.

Correct: Under the Investment Company Act of 1940 and the Investment Advisers Act of 1940, an investment adviser has a fiduciary duty to manage a fund in accordance with the investment objectives and policies stated in its prospectus and Statement of Additional Information (SAI). When a fund is marketed as Shariah-compliant, the specific screening criteria (such as interest-income thresholds) are considered material investment constraints. If a security fails these screens, the adviser must follow the disclosed remediation process, such as a specific divestment window. Furthermore, the SEC requires that any material deviations from stated investment strategies or risks be accurately reflected in periodic reports like Form N-PORT and Form N-CSR to ensure investors are not misled about the fund’s adherence to its Shariah mandate.

Incorrect: The approach of extending the divestment period beyond the prospectus-defined window while omitting this change from reports is a violation of the duty to provide accurate disclosures and constitutes a breach of the fund’s stated investment policy. The approach of recharacterizing non-compliant income and relying on purification without disclosing the underlying breach of the Shariah mandate fails to meet the transparency requirements of the Investment Company Act, as the breach itself is a material event for investors who chose the fund for its religious compliance. The approach of petitioning the SEC for a no-action letter on the basis that Shariah filters are merely religious guidelines is legally flawed; the SEC regulates the adherence to any stated investment strategy, and once a strategy is disclosed to the public, it becomes a binding regulatory commitment regardless of its religious or ethical origin.

Takeaway: In the United States, Shariah-compliant investment vehicles must treat their religious screening criteria as binding material disclosures subject to full SEC oversight and reporting requirements.

Correct: Under the Truth in Lending Act (TILA) and its implementing Regulation Z (12 CFR § 1026.43), lenders are required to make a reasonable, good-faith determination of a consumer’s ability to repay a credit extension. This ‘Ability-to-Repay’ (ATR) standard necessitates the verification of income, assets, and debt obligations using reasonably reliable third-party records, such as tax returns, W-2 forms, or payroll reports. Relying exclusively on unverified ‘alternative data’ for significant loan amounts fails to meet the regulatory threshold for verification and due diligence required by the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB).

Incorrect: The approach of adjusting the credit scoring algorithm to discount alternative data is insufficient because it merely recalibrates risk pricing without addressing the underlying legal requirement to verify the borrower’s actual financial capacity through third-party documentation. The strategy of utilizing digital disclosures and borrower certifications fails because federal suitability and ATR obligations are affirmative duties of the lender that cannot be waived or satisfied by a consumer’s self-certification. The method of implementing a random 5% manual sampling is inadequate because the ATR requirement is a transactional mandate that applies to every individual loan covered by the regulation, rather than a general portfolio-level quality control measure.

Takeaway: Federal banking regulations require lenders to verify a borrower’s ability to repay using reliable third-party documentation for each individual credit extension to satisfy suitability and compliance standards.

Correct: Under the Bank Secrecy Act (BSA) and implementing regulations, broker-dealers are required to file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN) for any transaction involving at least $5,000 that is suspected to involve funds derived from illegal activity or that lacks a clear business purpose. A critical component of this requirement is the prohibition against ‘tipping off’ the client; disclosing that a SAR is being filed or even discussed is a violation of federal law. Additionally, for high-risk accounts involving shell companies or high-risk jurisdictions, firms must perform Enhanced Due Diligence (EDD) to identify beneficial owners and understand the nature of the transactions as part of their AML program under FINRA Rule 3310.

Incorrect: The approach of requesting a written explanation from the client regarding the suspicious activity before filing a report is incorrect because it risks ‘tipping off’ the client, which could compromise a potential government investigation and violates BSA confidentiality provisions. The approach of filing a Currency Transaction Report (CTR) is technically incorrect for this scenario because CTRs are specifically required for physical currency (cash) transactions exceeding $10,000, whereas the scenario involves wire transfers. The approach of waiving the filing requirement based on the client’s tenure or ‘known entity’ status is a regulatory failure, as the obligation to report suspicious activity is triggered by the nature of the transaction itself, regardless of the length of the relationship or the client’s history.

Takeaway: Broker-dealers must file a SAR for suspicious transactions of $5,000 or more and are strictly prohibited by federal law from disclosing the filing to the client.

Correct: The correct approach is to recognize that within a Shariah governance framework, the rulings (fatwas) of the Shariah Supervisory Board (SSB) are binding on the institution’s operations. If a fund is marketed as Shariah-compliant, it must adhere to the specific governance and investment processes disclosed in its offering documents, including the mandatory purification of prohibited income. Under United States regulatory standards, specifically the Investment Advisers Act of 1940, an adviser has a fiduciary duty to follow the investment strategy and constraints disclosed to clients. Deviating from the SSB’s instructions regarding purification—even for small amounts—constitutes a failure to adhere to the stated investment mandate and can be considered a misleading practice or a breach of fiduciary duty.

Incorrect: The approach of allowing management to waive purification requirements based on administrative costs is incorrect because it subordinates the fund’s primary Shariah mandate to operational convenience, violating the governance structure promised to investors. Seeking a secondary opinion to establish a materiality threshold is inappropriate because Shariah compliance is determined by the appointed SSB, and introducing external thresholds without their approval undermines the established governance framework. The approach of shifting the burden of purification to individual investors is also flawed; while investors are ultimately responsible for their own religious compliance, a fund that claims to be Shariah-compliant at the institutional level must perform the purification at the fund level as part of its operational mandate and fiduciary promise.

Takeaway: Shariah governance requires that the Shariah Supervisory Board’s rulings are binding and that all disclosed purification processes are strictly followed to maintain regulatory compliance and fulfill fiduciary duties.

Correct: Under the Bank Secrecy Act (BSA) and the FinCEN Customer Due Diligence (CDD) Rule (31 CFR 1010.230), financial institutions must maintain a customer risk profile and conduct ongoing monitoring to identify and report suspicious transactions. For high-risk customers, such as Politically Exposed Persons (PEPs), Enhanced Due Diligence (EDD) is mandatory. This requires the firm to verify the source of wealth (SoW) using independent and reliable documentation rather than relying on internal memos or client assertions. When a deficiency is discovered during a regulatory inspection, the firm has an immediate obligation to remediate the file by obtaining the necessary verification and performing a ‘look-back’ review of past transactions to determine if a Suspicious Activity Report (SAR) is required under 31 CFR 1023.320.

Incorrect: The approach of relying on a letter of representation from the client’s legal counsel is insufficient because EDD standards require the financial institution to perform its own independent verification of the source of wealth to mitigate the risk of money laundering. The approach of documenting the oversight for future accounts while leaving the current file uncorrected fails to meet the ‘ongoing monitoring’ pillar of a compliant AML program and leaves the firm in a state of continuous non-compliance. The approach of immediately closing the account to avoid regulatory scrutiny is improper as it does not fulfill the firm’s legal obligation to investigate the suspicious activity and file a SAR if the transactions lack a clear economic purpose or appear to involve illicit funds.

Takeaway: For high-risk clients like PEPs, firms must independently verify the source of wealth and proactively remediate any identified CDD gaps to comply with Bank Secrecy Act requirements.

Correct: Under Law No. 7 of 2010, the Capital Markets Authority (CMA) is established as the independent regulatory body in Kuwait responsible for supervising securities activities, licensing ‘Licensed Persons’ (investment firms), and ensuring transparency in the capital markets. While the Central Bank of Kuwait (CBK) retains primary oversight of the banking sector, monetary policy, and credit regulation, any entity performing securities-related functions must be authorized by the CMA. For a United States firm engaging in cross-border activities or third-party partnerships in Kuwait, understanding this bifurcation is critical for regulatory mapping and risk assessment.

Incorrect: The approach of identifying the Ministry of Commerce and Industry as the primary financial regulator is incorrect because while the Ministry handles general commercial registration and corporate licensing, it does not possess the statutory mandate for financial services supervision held by the CMA and CBK. The approach of assuming the Central Bank of Kuwait has exclusive jurisdiction over all financial activities fails to account for the regulatory shift in 2010 which transferred securities oversight to the CMA. The approach of limiting the CMA’s authority strictly to the operations of the Boursa Kuwait exchange is inaccurate, as the CMA’s mandate extends to all securities-related activities, including investment advisory, fund management, and the conduct of licensed persons regardless of exchange listing.

Takeaway: Kuwaiti financial regulation is divided between the Central Bank for banking and monetary policy and the Capital Markets Authority for securities and investment activities.

Correct: Under the Bank Secrecy Act (BSA) and FinCEN regulations, financial institutions are required to file a Suspicious Activity Report (SAR) for any transaction involving $5,000 or more that the institution knows, suspects, or has reason to suspect is suspicious. The correct approach involves an independent investigation by the AML Compliance Officer and filing the SAR within the 30-day regulatory window (or 60 days if the suspect is unknown). Crucially, 31 U.S.C. 5318(g)(2) strictly prohibits ‘tipping off’ the subject of a SAR, meaning the firm must maintain absolute confidentiality regarding the filing to avoid criminal and civil penalties.

Incorrect: The approach of requiring a relationship manager to obtain a written explanation from the client before filing is flawed because it risks ‘tipping off’ the client that they are under suspicion, which is a direct violation of federal law. The approach of immediately freezing assets upon the detection of a red flag is generally incorrect because, in the United States, freezing assets typically requires a specific legal mandate, such as an OFAC match or a court order; doing so prematurely can alert the client and create legal liability for the firm. The approach of requiring Board approval for every SAR filing is inappropriate as it compromises the independence of the AML function and can lead to delays that exceed the 30-day regulatory filing deadline, while also introducing potential conflicts of interest regarding high-value clients.

Takeaway: A robust U.S. AML framework must prioritize independent compliance oversight and timely SAR filing while strictly adhering to non-disclosure requirements to prevent illegal tipping off.

Correct: The Bank Bribery Act (18 U.S.C. 215) prohibits bank employees from corruptly soliciting or accepting anything of value in connection with bank business, and similarly prohibits third parties from offering such items to influence bank decisions. When high-value entertainment occurs during a sensitive period like a distressed debt restructuring, it raises significant red flags regarding ‘corrupt intent.’ Under the Bank Secrecy Act and implementing regulations (31 CFR 1020.320), financial institutions are required to file a Suspicious Activity Report (SAR) for transactions that have no apparent lawful purpose or are not the sort in which the particular customer would normally be expected to engage, especially when they may involve violations of federal law like the Bank Bribery Act.

Incorrect: The approach of applying a retroactive exception based on the client’s historical revenue fails to address the primary legal risk, as the Bank Bribery Act focuses on the intent to influence specific transactions rather than the overall value of the client relationship. The approach of seeking post-facto approval and citing Regulation O is technically flawed because Regulation O governs extensions of credit to a bank’s own insiders (executive officers, directors, and principal shareholders), not the bank’s corporate clients. The approach of reclassifying the expenses and implementing automated blocks is an operational mitigation strategy that fails to address the immediate regulatory requirement to investigate potential criminal activity and fulfill mandatory SAR reporting obligations.

Takeaway: Compliance with federal banking laws requires investigating the intent behind high-value gifts and entertainment during credit negotiations to prevent Bank Bribery Act violations and ensure mandatory SAR filing.