[Federal Register: July 6, 2005 (Volume 70, Number 128)]
[Notices]
[Page 38990-38992]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jy05-145]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51935; File No. SR-NASD-2005-066]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to
Amendments to NASD Rule 3011 and the Adoption of New Related
Interpretive Material
June 29, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 23, 2005, the National Association of Securities Dealers, Inc.
(``NASD'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by NASD. The
Commission is publishing this notice to solicit comments on the
proposed rule change 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 Change
NASD is proposing to amend NASD Rule 3011 and adopt new related
interpretive material (``IM''), to (1) require each member to conduct
the independent test of its anti-money laundering program on an annual
basis, with the exception of certain types of firms, which would be
allowed to test every two years; (2) clarify the persons not considered
to be independent for purposes of Rule 3011(c), and therefore not
eligible to conduct the test; and (3) require a member to review and
update, if necessary, the accuracy of the member's anti-money
laundering compliance person information on a quarterly basis. The text
of the proposed rule change is available on NASD's Web site (http://www.nasd.com
), at NASD's Office of the Secretary, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statuory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. NASD 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
Financial institutions, including broker-dealers, must develop and
implement anti-money laundering (``AML'') programs pursuant to the Bank
Secrecy Act,\3\ as amended by Section 352 of the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001
(``PATRIOT Act'').\4\ Consistent with Treasury regulation 31 CFR
103.120 under the Bank Secrecy Act, NASD Rule 3011 requires that each
member develop and implement a written AML program and specifies the
minimum requirements for those programs.
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\3\ 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.
\4\ Pub. L. 107-56, 115 Stat. 272 (2001).
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Independent Testing
One of the AML program requirements is that firms independently
test their AML programs. Testing allows a member to review and assess
the adequacy of the firm's AML program and the firm's degree of
compliance with its written procedures. Test results alert members to
any deficiencies in their AML programs, thereby allowing them to take
appropriate corrective action or disciplinary action as the situation
may warrant. The independent test report also is an important tool for
regulators during their examinations of firms for
[[Page 38991]]
AML compliance to, among other things, ensure that the firms are
following up with corrective action when such tests discover AML
program deficiencies.
Frequency of Testing
Neither the Bank Secrecy Act nor Rule 3011 currently specifies the
frequency of independent testing, and members have asked NASD for
guidance on this issue. Given the important role that testing plays in
a firm ensuring that its AML program is effective in preventing money
laundering activities from occurring at or through the firm and, in
order to assure that member AML programs are serving their regulatory
purposes, the proposed rule change would require in most instances that
firms test their AML programs at least annually (on a calendar-year
basis). Certain firms, however, because of their business models and
activities may be able to test on a less frequent basis. Therefore, the
proposed rule change would allow members that do not execute
transactions for customers or otherwise hold customer accounts or act
as an introducing broker with respect to customer accounts to test at
least once every two years (on a calendar-year basis), rather than on
an annual basis. Examples of these types of firms may include firms
that engage solely in proprietary trading or that conduct business only
with other broker-dealers. In either case, the proposed rule change
establishes a minimum requirement, and members should undertake more
frequent testing than required if circumstances warrant.
Establishing Independence
Rule 3011(c) allows the independent testing of a firm's AML program
to be conducted by either member personnel or by a qualified outside
party. Some firms may find it more cost effective to use appropriately
trained firm personnel. In this regard, members have asked for guidance
on how to sufficiently maintain the independence of any internal
personnel conducting the test. The proposed rule change would require
the person conducting the independent test to have a working knowledge
of the applicable Bank Secrecy Act requirements and related
implementing regulations. The proposed rule change further clarifies
that, to ensure sufficient separation of functions for independence
purposes, the testing cannot be conducted by the AML compliance
person(s) designated in Rule 3011, by any person who performs the AML
functions being tested, or by any person who reports to any of these
persons.
Recognizing that these limitations may effectively prevent a small
firm from using appropriate internal personnel to conduct the tests,
the proposed rule change would allow tests to be conducted by persons
who report to either the AML compliance person or persons performing
AML functions if (1) the member has no other qualified personnel to
conduct the test; (2) the member establishes written policies and
procedures to address potential conflicts that can arise from allowing
the test to be conducted by a person in the reporting chain (e.g.,
anti-retaliation procedures); (3) to the extent possible, the results
of the test are reported to someone senior to the person to whom the
test conductor reports; and (4) the member documents its rationale,
which must be reasonable, for determining that it has no other
alternative than to comply in this manner.\5\ In addition, if the
person does not report the results to a person senior to the AML
compliance person or persons performing AML functions, the member must
document a reasonable explanation for not doing so.
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\5\ This exception is primarily intended to accommodate small
firms. For example, assume that all of a small firm's employees,
even those who do not perform any AML functions, report to the
firm's AML compliance person who is also the sole compliance officer
of the firm. The member could elect to use qualified internal
personnel who do not perform AML functions to conduct the
independent test, even though they report to the AML compliance
officer, provided all of the conditions set forth in proposed IM-
3011-1(c)(3) have been met.
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Consistent with SEC and NASD recordkeeping requirements, the member
would need to retain a copy of the documented rationale, which would be
reviewed by NASD examiners to assess whether the member's rationale
reasonably supports its determination.
NASD engaged in extensive discussions with the New York Stock
Exchange, Inc. (``NYSE'') to coordinate this proposed rule change
regarding independent testing of AML compliance programs. To the extent
possible, NASD and the NYSE have tried to develop consistent approaches
with variations where necessary to account for the differences in NASD
and NYSE membership, namely, differences in firm size, types of
businesses conducted, and overall business models.
AML Compliance Person--Review and Update of Contact Information
Paragraph (d) of Rule 3011 requires that each member designate and
identify to NASD the member's AML compliance person(s) and notify NASD
of any changes to the compliance person(s)' contact information. NASD
requires this information to, among other things, facilitate the
efforts of the Financial Crimes Enforcement Network, pursuant to
Section 314(a) of the PATRIOT Act and its implementing regulations, in
requesting information from financial institutions about persons
suspected of engaging in money laundering or terrorist activities.
Given the important role of the AML compliance person in ensuring
effective communication for purposes of identifying money-laundering
and terrorist financing activities, NASD believes that members should
review and update the AML compliance person information periodically to
ensure its accuracy. As such, the proposed rule change would require
that each member conduct a review and update, if necessary, of its AML
compliance person information within 17 business days after the end of
each calendar quarter.\6\ Quarterly reviews and updates are consistent
with NYSE requirements.\7\
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\6\ This proposed schedule is consistent with a member's
quarterly FOCUS reporting schedule, as well as with a member's
business continuity plan requirement to review and update emergency
contact information on a quarterly basis (see NASD Rule 3520(b)).
Similarly, the proposed schedule is consistent with the requirement
to review and update a member's Executive Representative designation
and contact information (see NASD Rule 1150) and to designate a
person to receive notifications relating to continuing education,
and the need to review and update such designation and contact
information (see NASD Rule 1120(a)(7)). When members file their
FOCUS reports each quarter, they are reminded of the need to review
and update this information on the NASD Contact System.
\7\ In Information Memo Number 02-41 (Aug. 30, 2002), the NYSE
stated that its members should review and/or update on a quarterly
basis (i.e., March, June, September, and December) the information
furnished on its Electronic Filing Platform, including information
regarding the member's or member organization's AML compliance
person.
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The proposed rule change also would clarify that the AML compliance
person must be an associated person of the member. As noted in Section
2 of this filing, NASD will announce the effective date of the proposed
rule change in a Notice to Members to be published no later than 60
days following Commission approval. The effective date will be not more
than 30 days following publication of the Notice to Members announcing
Commission approval.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act, which requires, among other
things, that NASD rules must be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to
[[Page 38992]]
protect investors and the public interest. NASD 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 person information.
B. Self-Regulatory Organization's Statement on Burden on Competition
NASD does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
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 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 NYSE.\8\
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\8\ 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.
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Specifically, the NASD and NYSE proposals differ in who would be
permitted to serve as a firm's designated AML compliance contact person
(``AML Officer''). 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. As discussed above, 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 NASD and
NYSE?
The NASD and NYSE 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 NASD and NYSE? 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-NASD-2005-066 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-NASD-2005-066. 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 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 NASD.
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-NASD-2005-
066 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. E5-3543 Filed 7-5-05; 8:45 am]
BILLING CODE 8010-01-P