[Federal Register Volume 67, Number 81 (Friday, April 26, 2002)]
[Notices]
[Pages 20854-20858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10313]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45798; File Nos. SR-NASD-2002-24 and SR-NYSE-2002-10]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc. and the New York Stock Exchange, Inc.; Order Approving 
Proposed Rule Changes Relating to Anti-Money Laundering Compliance 
Programs

April 22, 2002.

I. Introduction

    On February 15, 2002, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association''), through its subsidiary 
NASD Regulation, Inc. (``NASD Regulation''), filed with the Securities 
and Exchange Commission (``Commission'' or ``SEC''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to establish NASD 
Rule 3011, Anti-Money Laundering Compliance Program. The proposed rule 
change prescribes the minimum standards required for each member firm's 
anti-money laundering program. On February 25, 2002, notice of the 
proposed rule change was published in the Federal Register.\3\ The 
Commission received four comments on the proposal.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 45457 (February 19, 
2002), 67 FR 8565.
    \4\ March 18, 2002 letter from Alan E. Sorcher, Vice President 
and Associate General Counsel, Securities Industry Association 
(``SIA''), to Jonathan G. Katz, Secretary, SEC (``SIA Letter''); 
March 18, 2002 letter from Betty Santangelo, Schulte Roth & Zabel 
LLP, to Jonathan G. Katz, Secretary, SEC (``Schulte Roth Letter''); 
March 11, 2002 letter from W. Richard Mason, General Counsel, Mosaic 
Funds, to Secretary, SEC (``Mosaic Letter''); March 18, 2002 letter 
from Craig S. Tyle, General Counsel, Investment Company Institute 
(``ICI''), to Jonathan G. Katz, Secretary, SEC (``ICI Letter'').
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    On February 27, 2002, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed a proposed rule change to adopt NYSE Rule 445, 
Anti-Money Laundering Compliance Program. The proposed rule change 
would require each member and member organization to develop and 
implement an anti-money laundering compliance program consistent with 
applicable provisions of the Bank Secrecy Act and the regulations 
thereunder. On March 7, 2002, notice of the proposed rule change was 
published in the Federal Register.\5\ The

[[Page 20855]]

Commission received two comments on the proposal.\6\
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    \5\ Securities Exchange Act Release No. 45487 (February 28, 
2002), 67 FR 10463.
    \6\ The SIA Letter and the Schulte Roth Letter were filed as 
comments to both the NASD proposal and the NYSE proposal.
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    The NASD provided a response to the comment letters on April 17, 
2002.\7\ The NYSE provided a response to the comment letters on April 
16, 2002.\8\
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    \7\ See April 17, 2002 letter from Patrice M. Gliniecki, Vice 
President and Acting General Counsel, NASD Regulation, to Katherine 
A. England, Assistant Director, Division of Market Regulation 
(``Division''), SEC (``NASD Response Letter'').
    \8\ See April 16, 2002 letter from Richard P. Bernard, Assistant 
Corporate Secretary, NYSE, to Nancy Sanow, Assistant Director, 
Division, SEC (``NYSE Response Letter'').
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    This order approves the NASD and the NYSE proposed rule changes.

II. Description of the Proposed Rule Changes

SR-NASD-2002-24

    NASD Regulation proposes to establish NASD Rule 3011, Anti-Money 
Laundering Compliance Program, which requires financial institutions, 
including broker-dealers, by April 24, 2002, to establish and implement 
anti-money laundering compliance programs designed to ensure ongoing 
compliance with the requirements of the Bank Secrecy Act and the 
regulations promulgated thereunder. NASD Regulation proposes its anti-
money laundering compliance program rule to guide member firms on how 
to comply with Section 352 of the Uniting and Strengthening America by 
Providing Appropriate Tools Required to Intercept and Obstruct 
Terrorism Act of 2001 (``PATRIOT Act''). The proposed rule change 
prescribes the minimum standards required for each member firm's anti-
money laundering program.
    Under the proposal, on or before April 24, 2002, each NASD member 
is required to develop and implement a written anti-money laundering 
program reasonably designed to achieve and monitor the member's 
compliance with the requirements of the Bank Secrecy Act, and the 
implementing regulations promulgated thereunder by the Department of 
the Treasury (``Treasury''). Each member organization's anti-money 
laundering program must be approved, in writing, by a member of senior 
management.
    The anti-money laundering programs required under the proposal, at 
a minimum, must (1) establish and implement policies and procedures 
that can be reasonably expected to detect and cause the reporting of 
transactions required under 31 U.S.C. 5318(g) and the implementing 
regulations thereunder; (2) establish and implement policies, 
procedures, and internal controls reasonably designed to achieve 
compliance with the Bank Secrecy Act and the implementing regulations 
thereunder; (3) provide for independent testing for compliance to be 
conducted by member personnel or by a qualified outside party; (4) 
designate an individual or individuals responsible for implementing and 
monitoring the day-to-day operations and internal controls of the 
program; and (5) provide ongoing training for appropriate personnel.

SR-NYSE-2002-10

    The NYSE proposes to adopt NYSE Rule 445, Anti-Money Laundering 
Compliance Program. The proposed Rule, like the NASD proposal, requires 
each member and member organization to develop and implement an anti-
money laundering compliance program consistent with applicable 
provisions of the Bank Secrecy Act and the regulations thereunder.
    Under the NYSE's proposal, each member organization and each member 
not associated with a member organization must develop and implement a 
written anti-money laundering program reasonably designed to achieve 
and monitor compliance with the requirements of the Bank Secrecy Act, 
and the implementing regulations promulgated thereunder by Treasury. A 
member of senior management must approve, in writing, each member 
organization's anti-money laundering program. At a minimum, the anti-
money laundering programs must (1) establish and implement policies and 
procedures that can be reasonably expected to detect and cause the 
reporting of transactions required under 31 U.S.C. 5318(g) and the 
implementing regulations thereunder; (2) establish and implement 
policies, procedures, and internal controls reasonably designed to 
achieve compliance with the Bank Secrecy Act and the implementing 
regulations thereunder; (3) provide for independent testing for 
compliance to be conducted by member or member organization personnel 
or by a qualified outside party; (4) designate, and identify to the 
NYSE a person or persons responsible for implementing and monitoring 
the day-to-day operations and internal controls of the program and 
provide prompt notification to the NYSE regarding any change in such 
designation(s); and (5) provide ongoing training for appropriate 
persons.

III. Summary of Comments

    The Commission received four letters commenting on the NASD 
proposal.\9\ Of those four comment letters, two of them also were 
submitted as comments to the NYSE proposal.\10\ One commenter expressed 
support for the proposals, calling sound anti-money laundering programs 
``the starting point in the industry's effort in the prevention of 
money-laundering and the financing of terrorism.'' \11\ All of the 
commenters suggested that the proposals be modified.
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    \9\ See footnote 4, supra.
    \10\ See footnote 6, supra.
    \11\ SIA Letter at 2.
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    While the SIA expressed support for the proposed rules, it 
requested that the requirements imposed by the proposed rules be 
clarified. First, it requested that the rules require firms to have a 
written anti-money laundering program in place by April 24, 2002, but 
not to have implemented the program by that date.\12\ The SIA asserts 
that ``the language of Section 352 of the Patriot Act is clear that the 
requirement is to `establish' anti-money laundering programs,'' not to 
have actually implemented the programs by April 24, 2002.\13\
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    \12\ SIA Letter at 2-3.
    \13\ Id. at 3.
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    The SIA also requests clarification that the anti-money laundering 
programs required by April 24, 2002 are only required to account for 
the Bank Secrecy Act requirements that are in effect by that same 
date.\14\ The SIA states this clarification is necessary because some 
provisions of the PATRIOT Act have already become effective, while 
other provisions will become effective on a rolling basis throughout 
this year.\15\ The SIA questions the ability of firms to implement all 
aspects of these programs by April 24, 2002.\16\ For example, the SIA 
expressed strong support for the requirement that broker-dealers report 
suspicious activity. It also expressed concern that the rules could be 
read to require a firm to implement policies for reporting suspicious 
transactions before the time required by the statute.\17\ According to 
the commenter, Section 356 of the Patriot Act requires that broker-
dealers be subject to suspicious activity reporting requirements. Under 
Treasury's proposed rule implementing Section 356, such provision would 
take effect 180 days after a final rule is

[[Page 20856]]

issued by Treasury.\18\ The NYSE and NASD proposals require firms to 
establish and implement policies to comply with the Bank Secrecy Act 
and implementing regulations by April 24, 2002.
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    \14\ Id.
    \15\ Id.
    \16\ Id.
    \17\ Id.
    \18\ Id.
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    Finally, the SIA states the proposed rules should allow for 
extension beyond the April 24, 2002 compliance date, where full 
compliance cannot be timely achieved.\19\ To obtain an extension, the 
SIA suggests a firm would be required to demonstrate the firm made a 
good faith effort to comply, and that there were extenuating 
circumstances that justify an extension.\20\
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    \19\ Id. at 4.
    \20\ Id.
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    The Schulte Roth Letter suggests that the Commission and the self-
regulatory organizations should allow an exemption from the anti-money 
laundering program requirement for broker-dealers that do not maintain 
traditional customer relationships, such as investment partnerships and 
corporations that are exempt from registration under the Investment 
Company Act of 1940.\21\ Schulte Roth states these entities elect to 
register, or create a wholly-owned subsidiary to register, as a broker-
dealer to obtain more favorable margin treatment. According to the 
commenter, these entities are not required to register as broker-
dealers, and do not function as traditional broker-dealers, in that 
they do not engage in certain activities that are typically associated 
with a broker-dealer.\22\ Furthermore, the commenter states that these 
broker-dealers do not advertise or hold themselves out to the public as 
a dealer, nor do they render any incidental investment advice, extend 
or arrange for the extension of credit to others in connection with 
securities, or purchase or sell securities as principal from or to 
customers.\23\ Accordingly, the commenter asserts that these broker-
dealers should not be required to adopt an anti-money laundering 
program.\24\
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    \21\ Schulte Roth Letter at 3-4.
    \22\ Id.
    \23\ Id.
    \24\ Id. at 4.
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    The commenter also asserts that broker-dealers that merely engage 
in stock lending activities with other broker-dealers, agency lenders, 
and mutual funds, should not be required to adopt an anti-money 
laundering program, because they do not conduct transactions involving 
the purchase or sale of securities in the traditional sense and do not 
involve traditional customer relationships.\25\
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    \25\ Id.
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    Similarly, one commenter suggested that the NASD proposal be 
modified to state that a broker-dealer that does not receive customer 
funds or open or hold customer accounts is deemed to satisfy the anti-
money laundering program requirements by stating its understanding that 
it will be required to develop such a program before it actually 
receives customer funds or opens or holds customer accounts.\26\ The 
commenter suggests this modification to prevent broker-dealers that do 
not accept or hold customer accounts or receive any customer funds from 
going through the ``futile exercise'' of establishing programs that 
cannot be implemented because the broker-dealers are powerless to 
identify any potential money-laundered money or accounts.\27\
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    \26\ Mosaic Letter.
    \27\ Id.
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    The ICI submitted comments to address the NASD's proposal as it 
applies to NASD members that underwrite securities issued by registered 
investment companies.\28\ The ICI expressed strong support for 
``effective rules to combat potential money laundering activity in the 
investment company industry.'' It also proposed an exception to 
proposed NASD Rule 3011 for any NASD member with respect to its 
activities as a principal underwriter of mutual fund securities where 
the mutual funds such NASD member underwriters have established an 
anti-money laundering program that meets the requirements of Section 
352 of the PATRIOT Act and any rules that apply to funds adopted 
thereunder.\29\
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    \28\ ICI Letter at 1.
    \29\ Id.
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    The ICI provides two reasons for its proposed exception. First, the 
ICI states the exemption would avoid unnecessary regulatory 
duplication. The PATRIOT Act's requirement to establish an anti-money 
laundering compliance program by April 24, 2002 applies to funds and to 
broker-dealers. The ICI states that proposed regulations setting 
minimum standards for fund compliance programs are imminent. Where an 
underwriter is part of a fund complex, the ICI states it would be 
``logical'' for any relevant activities of the underwriter to be 
addressed by the funds' anti-money laundering program. In these 
situations, the ICI states there is no need for underwriters to comply 
with separate requirements imposed by the NASD on its members.\30\
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    \30\ Id. at 2.
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    Second, the ICI states the exception would eliminate a bifurcated 
anti-money laundering compliance examination regime. The ICI states 
that compliance with the anti-money laundering program requirements for 
funds will be examined by the Commission's Office of Compliance, 
Inspections and Examinations (``OCIE''). The ICI believes that OCIE is 
best able to examine funds comprehensively for compliance with anti-
money laundering requirements. To subject fund underwriters to NASD 
examination authority would, according to the ICI, ``create a piecemeal 
regulatory scheme that would be both duplicative and inefficient.'' 
\31\
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    \31\ Id.
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The NYSE's Response to Comments

    On April 16, 2002, the NYSE submitted a response to comments.\32\
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    \32\ See footnote 8, supra.
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    In response to the suggestion that Section 352 of the PATRIOT Act 
requires only that firms ``establish'' written anti-money laundering 
programs by April 24, 2002, the NYSE states that members and member 
organizations must be in compliance with federally mandated 
requirements of Section 352 by April 24, 2002, by establishing written 
policies and procedures that have been approved in writing by senior 
management, that address all applicable Bank Secrecy Act requirements. 
These policies should address the member organization's employee 
training program and independent audit functions.\33\ The NYSE also 
indicates that proposed NYSE Rule 445 requires that the anti-money 
laundering programs provide for independent testing for compliance, and 
that policies, procedures, and internal controls must be reasonably 
designed to achieve compliance with applicable federal requirements. 
The NYSE expects implementation of the required independent testing 
function to be ``timely and effective.'' \34\ As for implementation of 
policies related to anti-money laundering requirements that have yet to 
be adopted, the NYSE expects they will be implemented concurrently with 
their respective effective dates.\35\ The NYSE further clarified that 
it will not require compliance with Bank Secrecy Act provisions before 
their prescribed effective dates.\36\ The NYSE also confirmed its 
understanding that the suspicious activity reports (``SAR'') reporting 
requirements under 31 U.S.C. 5318(g) are expected to become effective

[[Page 20857]]

180 days after the date on which final regulations are issued by 
Treasury.\37\
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    \33\ NYSE Response Letter at 2.
    \34\ Id.
    \35\ Id.
    \36\ Id.
    \37\ Id. at 3.
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    With regard to establishing a procedure to allow for extensions of 
the April 24, 2002 compliance date, the NYSE stated that the 
requirements outlined by proposed NYSE Rule 445 are practical 
applications of federal law and that it has no authority to grant 
extensions for compliance with federally mandated deadlines.\38\ 
Similarly, in response to the commenter's suggestion that proposed NYSE 
Rule 445 grant an exemption from the requirement to adopt an anti-money 
laundering program for broker-dealers that do not engage in activities 
traditionally undertaken by registered broker-dealers such as hedge 
funds, or broker-dealers that engage in stock lending activities with 
other broker-dealers, agency lenders like banks, and mutual funds, the 
NYSE again maintains it has no authority to grant such relief from the 
requirement, as the requirement is mandated by federal law.\39\ The 
NYSE takes the position that each entity subject to anti-money 
laundering requirements is required to implement policies and 
procedures that are ``reflective of the type and nature of their 
business and that exemptions for hedge funds, investment companies, 
etc. would not be appropriate.'' \40\
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    \38\ Id.
    \39\ Id.
    \40\ Id.
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NASD Regulation's Response to Comments

    NASD Regulation submitted a response To comments on April 17, 
2002.\41\
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    \41\ See footnote 7, supra.
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    In response to the commenters' assertion that certain broker-
dealers be exempt from the requirements of proposed NASD Rule 3011, 
NASD Regulation, like the NYSE, stated that the requirement to 
establish an anti-money laundering compliance program is a ``mandate of 
federal law.'' \42\ While Section 352 requires Treasury to issue 
regulations by April 24, 2002 that address the applicability of the 
statutory requirements to different types of financial institutions, it 
does not allow for the NASD or other self-regulatory organizations to 
grant exemptions to any types of broker-dealers from the statutory 
requirements.\43\ NASD Regulation suggests that anti-money laundering 
programs at firms that have no customers and handle no funds will be 
tailored to focus on ``potential employee misconduct and counterparty 
awareness.'' \44\ Similarly, with regard to the ICI's request that an 
exemption be allowed for an NASD member with respect to its activities 
as principal underwriter of mutual fund securities where the fund 
complex being underwritten has established anti-money laundering 
compliance programs that meet the requirements of Section 352, NASD 
Regulation reiterates that all broker-dealers are required to enact 
appropriate compliance procedures.\45\ In establishing such programs, 
NASD Regulation suggests that broker-dealers may coordinate their 
efforts by taking account of programs and procedures of other firms 
with which they do business. It also suggests that principal 
underwriters to mutual funds would be expected to have similarly 
targeted procedures once the firms had assured themselves that the 
investment adviser or transfer agent within the fund complex had 
established and implemented a sufficient anti-money laundering program. 
NASD Regulation notes that each firm must have its own program designed 
to detect suspicious activity, and no broker-dealer may rely solely on 
a program implemented by a firm with which it does business or has a 
business relationship.\46\
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    \42\ Id. at 2.
    \43\ Id.
    \44\ Id.
    \45\ Id. at 3.
    \46\ Id.
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    Regarding the SIA's concerns that the proposed rule's requirement 
to both establish and implement compliance programs by April 24, 2002 
is beyond the scope of Section 352, NASD Regulation asserts that its 
proposed Rule is consistent with Section 352.\47\ NASD Regulation 
states that it does not suggest that all aspects of a firm's anti-money 
laundering compliance program must be operational by April 24, 2002. 
Instead, NASD Regulation believes that firms must put in place written 
procedures, and take ``meaningful steps'' to carry out the procedures 
to the extent possible by April 24, 2002.\48\
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    \47\ Id.
    \38\ Id.
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    With regard to the SIA's and ICI's requests for clarification that 
the compliance programs required by April 24, 2002 need only address 
the Bank Secrecy Act requirements that are in effect by that date, NASD 
Regulation states that it agrees a member's program must continuously 
evolve to adapt to new Bank Secrecy Act requirements as they are 
adopted.\49\ Additionally, NASD Regulation believes its proposed new 
Rule does not require a firm's compliance program to reflect those Bank 
Secrecy Act requirements that are not in effect by April 24, 2002. NASD 
Regulation, however, encourages all firms to comply voluntarily with 
those provisions of the Bank Secrecy Act not yet in effect to the 
extent practicable, rather than waiting for mandatory compliance 
deadlines.\50\ With respect to the SIA's comment that the broker-dealer 
SAR reporting requirement is not expected to be in effect until 180 
days after Treasury issues final rules, NASD Regulation states that an 
anti-money laundering program need only achieve compliance with 
requirements that are in effect. However, NASD Regulation states that 
broker-dealers should consider filing SARs voluntarily before the 
effective date of the regulations, and programs must be adapted to 
provide procedures for reporting suspicious transactions consistent 
with the final rule once it becomes effective.\51\
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    \49\ Id. at 4.
    \50\ Id.
    \51\ Id. at 4-5.
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    Finally, with regard to the SIA's request that the NASD's proposed 
rule be modified to allow for exemptions from the compliance date under 
certain circumstances, NASD Regulation notes that the law does not 
grant NASD Regulation or any other self-regulatory organization the 
authority to grant exemptions or extensions of time for compliance.\52\
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    \52\ Id. at 5.
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IV. Discussion and Commission Findings

    The Commission has reviewed carefully the NASD's and NYSE's 
proposed rule changes, the comment letters, and the NASD's and NYSE's 
responses to the comments, and finds, for the reasons set forth below, 
that the proposals are consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a registered 
national securities association,\53\ and a national securities and 
exchange, and, in particular, with the requirements of Sections 
15A(b)(6) \54\ and 6(b)(5) \55\ of the Act. Section 15A(b)(6) requires 
the rules of a registered national securities association be designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the

[[Page 20858]]

mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Section 
6(b)(5) imposes the same requirements on a national securities 
exchange.
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    \53\ In approving these rules, the Commission has considered 
their impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \54\ 15 U.S.C. 78o-3(b)(6).
    \55\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposed rule changes are consistent 
with these Sections of the Act. The Commission finds that the NASD and 
the NYSE have proposed rules that accurately, reasonably, and 
efficiently implement the requirements of the PATRIOT Act as it applies 
to their members. While the Commission acknowledges that the commenters 
have raised possible burdens these proposed rules place upon certain 
entities that are required to implement anti-money laundering 
compliance programs by April 24, 2002, the Commission agrees with NASD 
Regulation and the NYSE that they have no authority to grant exceptions 
or exemptions to these federally mandated requirements and deadlines. 
The Commission believes that NYSE and NASD members that are subject to 
the requirements of the PATRIOT Act must have written anti-money 
laundering programs in place by April 24, 2002, and must implement 
those procedures in a timely fashion. The Commission also recognizes, 
however, that anti-money laundering compliance programs will evolve 
over time, and that improvements to these programs are inevitable as 
members find new ways to combat money laundering and to detect 
suspicious activities.
    With regard to all other issues raised by the commenters, the 
Commission is satisfied that NASD Regulation and the NYSE have 
adequately and accurately addressed the commenters' concerns.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\56\ that the proposals SR-NASD-2002-24 and SR-NYSE-2002-10 be and 
hereby are approved.
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    \56\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\57\
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    \57\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-10313 Filed 4-25-02; 8:45 am]
BILLING CODE 8010-01-U