[Federal Register: July 6, 2005 (Volume 70, Number 128)]
[Notices]
[Page 38994-38997]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jy05-147]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51934; File No. SR-NYSE-2005-36]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change To Amend Rule 445
June 29, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is
hereby given that on May 23, 2005, the New York Stock Exchange, Inc.
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or the ``Commission'') the proposed rule changes as
described in Items I, II, and III below, which items have been prepared
by the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule changes from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Changes
The Exchange proposes to amend Rule 445 (``Anti-Money Laundering
Compliance Program'') to establish: (1) Timeframes within which the
required independent testing function must be performed; (2)
qualification and independence standards for those who conduct such
testing function; and (3) jurisdictional requirements pertaining to AML
Officers (as defined below). The text of the proposed rule change is
available on the NYSE's Web site (http://www.NYSE.com), at the NYSE's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule changes.
The text of these statements may be examined at the places specified in
Item IV below.
[[Page 38995]]
The Exchange has prepared summaries, set forth in Sections (A), (B),
and (C) below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Summary
The proposed rule change consists of amendments to Rule 445
(``Anti-Money Laundering Compliance Program'') to establish that the
``independent testing'' requirement of the Rule must be conducted, at
minimum, on an annual calendar-year basis by members and member
organizations that conduct a public business, or every two years if no
public business is conducted. The amendments also establish a standard
to determine who is adequately qualified and sufficiently independent
to conduct the required testing. Further, they clarify that each person
designated to implement and monitor an Anti-Money Laundering Program
must either be an employee of the member or member organization for
which they are designated or, with the prior approval of the Exchange,
an employee of a parent, affiliate, or subsidiary of the member or
member organization. Employees of a parent, affiliate, or subsidiary of
a member or member organization who are designated to implement and
monitor Anti-Money Laundering Programs must consent to the jurisdiction
of the Exchange and the member or member organization must acknowledge
their responsibility to supervise them as employees.
Background and Detail
Rule 445, which became effective on April 24, 2002,\3\ requires
each member organization and each member not associated with a member
organization to develop and implement an anti-money laundering
(``AML'') program consistent with ongoing obligations pursuant to
Treasury regulation 31 CFR 103.120 under the Bank Secrecy Act,\4\ as
amended by the United and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT ACT) Act of 2001.\5\
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\3\ See Securities Exchange Act Release No. 45798 (April 22,
2002); 67 FR 20854 (April 26, 2002) (SR-NYSE-2002-10).
\4\ Currency and Foreign Transactions Reporting Act of 1970
(commonly referred to as the Bank Secrecy Act), 12 U.S.C. 1829b, 12
U.S.C. 1951-1959, and 31 U.S.C. 5311-5330.
\5\ Pub. L. 107-56, 115 Stat. 272 (2001).
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The prescribed AML program obligations include the development of
internal policies, procedures and controls; the designation of a person
to implement and monitor the day-to-day operations and internal
controls of the program (commonly referred to as an ``AML Officer'');
ongoing training for appropriate persons; and an independent testing
function for overall compliance.
Neither the Bank Secrecy Act nor Rule 445 currently specifies: (1)
Timeframes within which the independent testing function must be
performed, (2) qualification and independence standards for those who
conduct such testing function, or (3) jurisdictional requirements
pertaining to AML Officers. In order to provide interpretive clarity to
the text, the following amendments to Rule 445 are proposed.
Timeframes for Independent Testing
The proposed amendments would require that independent testing of
AML programs be conducted, at a minimum, on an annual (calendar-year)
basis by members or member organizations that conduct a public
business, or every two years if no public business is conducted (i.e.,
if the member or member organization engages solely in proprietary
trading, and/or conducts business only with other broker-dealers). The
Exchange believes these timeframes are reasonable in that they require
more frequent testing of AML programs designed to monitor a public
business, which is likely more susceptible to money laundering schemes
than strictly proprietary business. Further, the one-year time frame
for testing is consistent with standard industry practice in that it is
similar to generally accepted guidelines for conducting tests in the
context of, for instance, general audits and branch office visits.
However, the proposed amendments make clear that more frequent testing
should be conducted if circumstances warrant (e.g., should the business
mix of the member or member organization materially change; in the
event of a merger or acquisition; in light of systemic weaknesses
uncovered via testing of the AML program; or in response to any other
``red flags'').
Qualification and Independence Standards for Testing
With regard to who is adequately qualified and sufficiently
independent to conduct the independent testing function, the proposed
amendments would require that testing be conducted by a designated
person with a working knowledge of applicable requirements under the
Bank Secrecy Act and its implementing regulations. Such person need not
be an employee of the member or member organization since the
responsibility being delegated is essentially an auditing function and,
as such, it would not be unusual or ineffective for it to be performed
by an independent outside party. As noted below, the proposed
amendments require that the day-to-day responsibilities for monitoring
operations and internal controls of AML programs be performed by a
person fully subject to the supervision of the member or member
organization for which they are designated, and to the jurisdiction of
the Exchange.
The proposed amendments do not preclude an employee of the member
or member organization from conducting the required independent testing
of the AML program; however the proposed ``independence'' standard
would prohibit testing from being conducted by a person who performs
the functions being tested, or by the designated AML compliance
officer, or by a person who reports to either. This standard is
designed to promote the independence, and thus the integrity, of the
testing function by insulating it from the day-to-day administration of
the activities being tested. It also serves to remove the testing
function from the supervisory structure of the member or member
organization, thus eliminating the possibility that a person might not
candidly report shortcomings in a system designed by their supervisor
for fear of reprisal.
Jurisdiction Over AML Officers
The proposed amendments clarify that the person or persons
designated to implement and monitor a member's or member organization's
Anti-Money Laundering Program (commonly referred to as an AML Officer,
as previously indicated) must either be an employee of the member or
member organization for which they are designated or, with the prior
approval of the Exchange, an employee of a parent, affiliate or
subsidiary of the member or member organization.
The rationale behind the proposal to allow employees of parents,
affiliates and subsidiaries to be designated AML Officers of members
and member organizations is the recognition that AML programs may be
integrated into, and extend throughout, the corporate family.
Accordingly, a person acting as an AML Officer for both a member
organization and the member organization's parent bank would be better
situated to see the ``big picture'' (i.e., to monitor the movements of
funds
[[Page 38996]]
and securities throughout the corporate structure and, thus, be better
able to identify and understand AML issues across the range of such
structure). The ability to situate AML Officers where they can be most
effective gives members and member organizations the flexibility to
integrate their AML program into the larger corporate structure to
achieve a more global perspective, and thus a more comprehensive and
effective AML program.
The prior written approval of the Exchange is required if the
designated AML Officer is other than an employee of the member or
member organization. Further, each such person must execute an
attestation, acceptable to the Exchange, consenting to the supervision
of each member or member organization for which they are designated and
to the jurisdiction of the Exchange. A proposed example of such an
attestation is included in Exhibit 3 of the proposed rule change, which
is available on the NYSE's Web site (http://www.NYSE.com), at the
NYSE's principal office, and at the Commission's Public Reference Room,
under the heading ``AML Officer Consent to Jurisdiction.'' In addition,
the member or member organization must execute an agreement, acceptable
to the Exchange, acknowledging their responsibility to supervise, as an
employee for all regulatory purposes, each such person designated by
them. A proposed example of such an agreement is included in Exhibit 3
of the proposed rule change under the heading ``Acknowledgement of
Supervisory Responsibility over AML Officer.''
2. Statutory Basis
The proposed rule change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to a
national securities exchange, and in particular, with the requirements
of Sections 6(b)(5) \6\ of the Exchange Act. Section 6(b)(5) requires,
among other things, that the rules of an exchange be designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and national
market system, and in general, to protect investors and the public
interest. NYSE believes that the proposed rule change is designed to
accomplish these ends by requiring members to conduct periodic tests of
their AML compliance programs, preserve the independence of their
testing personnel, and ensure the accuracy of their AML compliance
program.\7\
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\6\ 15 U.S.C. 78f(b)(5).
\7\ Statement regarding NYSE beliefs is based on statements by
the NYSE during a conference call with the staff of the Division of
Market Regulation on June 27, 2005.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposal does not impose any burden
on competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange Act. The Commission particularly
urges commenters to consider the proposed rule change in light of a
similar but not identical proposed rule change by the National
Association of Securities Dealers, Inc. (``NASD'').\8\
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\8\ The text of the proposed rule change is available on the
NASD's Web site (http://www.nasd.com), at the NASD's Office of the
Secretary, and at the Commission's Public Reference Room.
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Specifically, the NYSE and NASD proposals differ in who would be
permitted to serve as an AML Officer. As discussed above, the NYSE
proposal would, subject to certain restrictions, permit the AML Officer
to be an employee of a parent, affiliate, or subsidiary of a member.
The NASD proposal, however, would require the AML Officer to be an
``associated person of the member,'' as that term is defined in Article
I(dd) of the NASD By-Laws. Serving as an AML Officer, by itself, would
not make a person an associated person of an NASD member. What issues,
if any, would arise from the application of both standards regarding
who can serve as an AML Officer at firms that are dual members of the
NYSE and NASD?
The NYSE and NASD proposals also differ in who would be permitted
to perform the independent testing function for AML compliance.
Primarily to accommodate smaller firms, the NASD proposal would permit
an employee who reports to a person who performs the functions being
tested and/or reports to the AML Officer to perform the independent
testing, if, among other requirements, the member has no other
qualified internal personnel to conduct the test and the member creates
a written policy to address conflicts. The NYSE proposal, however,
would not permit an employee who reports to a person who performs the
functions being tested or reports to the AML Officer to perform the
independent testing. How would these standards, if adopted, affect the
AML program of dual members of the NYSE and NASD? Firms are invited to
discuss how this would affect their specific operations.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSE-2005-36 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-NYSE-2005-36. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro/shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the
[[Page 38997]]
public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Room, 100 F Street, NE., Washington, DC 20549. Copies of such
filing will also be available for inspection and copying at the
principal office of the NYSE.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to the File Number SR-NYSE-2005-
36 and should be submitted on or before July 27, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3539 Filed 7-5-05; 8:45 am]
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