[Federal Register Volume 67, Number 126 (Monday, July 1, 2002)]
[Rules and Regulations]
[Pages 44048-44057]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16416]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA21


Financial Crimes Enforcement Network; Amendment to the Bank 
Secrecy Act Regulations--Requirement that Brokers or Dealers in 
Securities Report Suspicious Transactions

AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This document contains amendments to the regulations 
implementing the statute generally referred to as the Bank Secrecy Act 
(``BSA''). The amendments require brokers or dealers in securities 
(``broker-dealers'') to report suspicious transactions to the 
Department of the Treasury. The amendments constitute a further step in 
the creation of a comprehensive system for the reporting of suspicious 
transactions by the major categories of financial institutions 
operating in the United States, as a part of the counter-money 
laundering program of the Department of the Treasury.

DATES: Effective Date: July 31, 2002.
    Applicability Date: December 30, 2002. See 31 CFR 103.19(h) of the 
final rule contained in this document.

FOR FURTHER INFORMATION CONTACT: Peter G. Djinis, Executive Assistant 
Director for Regulatory Policy, FinCEN, at (703) 905-3930; Judith R. 
Starr, Chief Counsel, Cynthia L. Clark, Deputy Chief Counsel, and 
Christine L. Schuetz, Attorney-Advisor, Office of Chief Counsel, 
FinCEN, at (703) 905-3590.

SUPPLEMENTARY INFORMATION:

I. Statutory Provisions

    The BSA, Public Law 91-508, as amended, codified at 12 U.S.C. 
1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5332, authorizes the 
Secretary of the Treasury, inter alia, to issue regulations requiring 
financial institutions to keep records and file reports that are 
determined to have a high degree of usefulness in criminal, tax, and 
regulatory matters, or in the conduct of intelligence or counter-
intelligence activities to protect against international terrorism, and 
to implement counter-money laundering programs and compliance 
procedures.\1\ Regulations implementing Title II of the BSA (codified 
at 31 U.S.C. 5311 et seq.) appear at 31 CFR part 103. The authority of 
the Secretary to administer the BSA has been delegated to the Director 
of FinCEN.
---------------------------------------------------------------------------

    \1\ Language expanding the scope of the BSA to intelligence or 
counter-intelligence activities to protect against international 
terrorism was added by section 358 of the Uniting and Strengthening 
America by Providing Appropriate Tools Required to Intercept and 
Obstruct Terrorism (USA PATRIOT ACT) Act of 2001 (the ``USA Patriot 
Act''), Public Law 107-56.
---------------------------------------------------------------------------

    The Secretary of the Treasury was granted authority in 1992, with 
the enactment of 31 U.S.C. 5318(g),\2\ to require financial 
institutions to report suspicious transactions. As amended by the USA 
Patriot Act, subsection (g)(1) states generally:

    \2\ 31 U.S.C. 5318(g) was added to the BSA by section 1517 of 
the Annunzio-Wylie Anti-Money Laundering Act (the ``Annunzio-Wylie 
Anti-Money Laundering Act''), Title XV of the Housing and Community 
Development Act of 1992, Public Law 102-550; it was expanded by 
section 403 of the Money Laundering Suppression Act of 1994 (the 
``Money Laundering Suppression Act''), Title IV of the Riegle 
Community Development and Regulatory Improvement Act of 1994, Public 
Law 103-325, to require designation of a single government recipient 
for reports of suspicious transactions.
---------------------------------------------------------------------------

    The Secretary may require any financial institution, and any 
director, officer, employee, or agent of any financial institution, 
to report any suspicious transaction relevant to a possible 
violation of law or regulation.

    Subsection (g)(2)(A) provides further that

    If a financial institution or any director, officer, employee, 
or agent of any financial institution, voluntarily or pursuant to 
this section or any other authority, reports a suspicious 
transaction to a government agency--
    (i) the financial institution, director, officer, employee, or 
agent may not notify any person involved in the transaction that the 
transaction has been reported; and
    (ii) no officer or employee of the Federal Government or of any 
State, local, tribal, or territorial government within the United 
States, who has any knowledge that such report was made may disclose 
to any person involved in the transaction that the transaction has 
been reported, other than as necessary to fulfill the official 
duties of such officer or employee.

    Subsection (g)(3)(A) provides that neither a financial institution, 
nor any director, officer, employee, or agent of any financial 
institution

that makes a voluntary disclosure of any possible violation of law 
or regulation to a government agency or makes a disclosure pursuant 
to this subsection or any other authority * * * shall * * * be 
liable to any person under any law or regulation of the United 
States, any constitution, law, or regulation of any State or 
political subdivision of any State, or under any contract or other 
legally enforceable agreement (including any arbitration agreement), 
for such disclosure or for any failure to provide notice of such 
disclosure to the person who is the subject of such disclosure or 
any other person identified in the disclosure.

    Finally, subsection (g)(4) requires the Secretary of the Treasury, 
``to the extent practicable and appropriate,'' to designate ``a single 
officer or agency of the United States to whom such reports shall be 
made.'' \3\ The designated agency is in turn responsible for referring 
any report of a suspicious transaction to ``any appropriate law 
enforcement, supervisory agency, or United States intelligence agency 
for use in the conduct of intelligence or counterintelligence 
activities, including

[[Page 44049]]

analysis, to protect against international terrorism.'' Id., at 
subsection (g)(4)(B).
---------------------------------------------------------------------------

    \3\ This designation does not preclude the authority of 
supervisory agencies to require financial institutions to submit 
other reports to the same agency or another agency ``pursuant to any 
other applicable provision of law.'' 31 U.S.C. 5318(g)(4)(C).
---------------------------------------------------------------------------

    Section 356 of the USA Patriot Act required Treasury, after 
consultation with the Securities and Exchange Commission and the Board 
of Governors of the Federal Reserve System, to publish proposed 
regulations before January 1, 2002, requiring broker-dealers to report 
suspicious transactions under 31 U.S.C. 5318(g). In accordance with 
this requirement, Treasury published a Notice of Proposed Rulemaking 
relating to suspicious transaction reporting by broker-dealers on 
December 31, 2001. Section 356 requires final regulations to be issued 
by July 2, 2002.

II. Broker-Dealer Regulation and Money Laundering

    The regulation of the securities industry in general and of broker-
dealers in particular relies on both the Securities and Exchange 
Commission (the ``SEC'') and the registered securities associations and 
national securities exchanges (so-called self-regulatory organizations 
or ``SROs''). Broker-dealers have long reported securities law 
violations through existing relationships with law enforcement, the 
SEC, and the SROs. The SEC and the SROs have taken measures to address 
money laundering concerns at broker-dealers.\4\ The SEC adopted rule 
17a-8 in 1981 under the Securities and Exchange Act of 1934 (``Exchange 
Act''), which enables the SROs, subject to SEC oversight, to examine 
for BSA compliance. Accordingly, both the SEC and SROs will address 
broker-dealer compliance with this rule.
---------------------------------------------------------------------------

    \4\ For example, in April 2001, the Director of the Office of 
Compliance Inspections and Examinations at the SEC announced that 
the Commission would undertake compliance sweeps of broker-dealers 
in the fall of 2001. See Money Laundering: It's on the SEC's Radar 
Screen, Remarks at the Conference on Anti-Money Laundering 
Compliance for Broker-Dealers Securities Industry Association (May 
8, 2001) (transcript available at www.sec.gov/news/speech/spch486.htm). BSA compliance with non-suspicious activity reporting 
related provisions has been included in the SEC's examination and 
enforcement programs since the 1970s, and in the SROs' programs 
since 1982. The New York Stock Exchange and the National Association 
of Securities Dealers have both issued statements dating back to 
1989 regarding the importance of suspicious activity reporting to 
avoid money laundering charges. See Report to the Chairman, 
Permanent Subcommittee on Investigations, Committee on Governmental 
Affairs, U.S. Senate, Anti-Money Laundering Efforts in the 
Securities Industry, GAO-02-111, October 2001, at 22.
---------------------------------------------------------------------------

    Certain broker-dealers have been subject to suspicious transaction 
reporting since 1996. In particular, broker-dealers that are affiliates 
or subsidiaries of banks or bank holding companies have been required 
to report suspicious transactions by virtue of the application to them 
of rules issued by the federal bank supervisory agencies. In April 
1996, banks, thrifts, and other banking organizations became subject to 
a requirement to report suspicious transactions pursuant to final rules 
issued by FinCEN,\5\ under the authority contained in 31 U.S.C. 
5318(g). In collaboration with FinCEN, the federal bank supervisors 
(the Board of Governors of the Federal Reserve System (``Federal 
Reserve''), the Office of the Comptroller of the Currency (``OCC''), 
the Federal Deposit Insurance Corporation (``FDIC''), the Office of 
Thrift Supervision (``OTS''), and the National Credit Union 
Administration (``NCUA'')) concurrently issued suspicious transaction 
reporting rules under their own authority. See 12 CFR 208.62 (Federal 
Reserve Board); 12 CFR 21.11 (OCC); 12 CFR 353.3 (FDIC); 12 CFR 563.180 
(OTS); and 12 CFR 748.1 (NCUA). The bank supervisory agency rules apply 
to banks, non-depository institution affiliates and subsidiaries of 
banks and bank holding companies (including broker-dealers), and bank 
holding companies (including bank holding companies that are themselves 
broker-dealers).\6\ The final rule contained in this document applies 
to all broker-dealers, without regard to whether they are affiliates or 
subsidiaries of banks or bank holding companies.\7\
---------------------------------------------------------------------------

    \5\ See 31 CFR 103.18. The suspicious transaction reporting 
rules under the BSA for banking organizations previously appeared at 
31 CFR 103.21 before that section was renumbered as 31 CFR 103.18. 
See 65 FR 13683, 13692 (March 14, 2000).
    \6\ For example, 12 CFR 225.4(f) subjects non-bank subsidiaries 
of bank holding companies to the suspicious transaction reporting 
requirements of Regulation H of the Board of Governors at 12 CFR 
208.62. Broker-dealers to which the bank supervisory agency rules 
for suspicious transaction reporting currently apply represent 
approximately half of the business of the broker-dealer industry, 
although in terms of numbers, they are only a small percentage of 
the approximately 8,300 broker-dealers in the United States.
    \7\ Money transmitters, issuers, sellers, and redeemers of money 
orders, and issuers, sellers, and redeemers of traveler's checks are 
subject to a similar reporting requirement pursuant to a final rule 
published in the Federal Register on March 14, 2000. See 31 CFR 
103.20. Under that rule, reporting is required for suspicious 
transactions involving or aggregating at least $2,000 in general or 
at least $5,000 in the case of issuers of money orders and 
traveler's checks to the extent the transactions to be reported are 
identified from a review of clearance records and similar documents. 
Finally, FinCEN has proposed a rule that would require casinos and 
card clubs to report suspicious transactions involving or 
aggregating at least $3,000. See 63 FR 27230 (May 18, 1998), and 67 
FR 15138 (March 29, 2002).
---------------------------------------------------------------------------

Anti-Money Laundering Compliance Programs

    The provisions of 31 U.S.C. 5318(h), added to the BSA in 1992 by 
section 1517 of the Annunzio-Wylie Anti-Money Laundering Act, authorize 
the Secretary of the Treasury ``[i]n order to guard against money 
laundering through financial institutions * * * [to] require financial 
institutions to carry out anti-money laundering programs.'' 31 U.S.C. 
5318(h)(1). Those programs may include ``the development of internal 
policies, procedures, and controls''; ``the designation of a compliance 
officer''; ``an ongoing employee training program'; and ``an 
independent audit function to test programs.'' 31 U.S.C. 5318(h)(A-D). 
Section 352 of the USA Patriot Act amended section 5318(h) to require 
all entities defined as ``financial institutions'' under the BSA, 
including broker-dealers, to develop and implement anti-money 
laundering programs by April 24, 2002.
    On April 23, 2002, FinCEN promulgated regulations under section 352 
of the USA Patriot Act.\8\ Among other things, the rules provide that 
broker-dealers will be deemed to be in compliance with section 352 of 
the USA Patriot Act if they establish and maintain anti-money 
laundering programs as required by the SEC or SROs. The SEC has 
recently published Orders approving rules proposed by the National 
Association of Securities Dealers, Inc. (``NASD''), the New York Stock 
Exchange, Inc. (``NYSE''), and the Philadelphia Stock Exchange, 
requiring member organizations to develop and implement anti-money 
laundering programs.\9\ The rules were drafted to provide minimum 
standards for the mandatory anti-money laundering program requirement 
contained in section 352 of the USA Patriot Act. In addition, these 
securities self-regulatory organization rules will also require broker-
dealers to have compliance programs for suspicious transaction 
reporting.\10\
---------------------------------------------------------------------------

    \8\ See 67 FR 21110--21127 (April 29, 2002).
    \9\ See 67 FR 20854 (April 26, 2002), and 67 FR 40366 (June 12, 
2002).
    \10\ Existing securities law and self-regulatory organization 
rules will ensure that broker-dealers have suspicious activity 
reporting rule compliance programs in place. In particular, section 
19(g) of the Exchange Act provides that ``[e]very self-regulatory 
organization shall comply with the provisions of this title, the 
rules and regulations thereunder, and its own rules, and * * * 
absent reasonable justification or excuse enforce compliance.'' Both 
the National Association of Securities Dealers and the New York 
Stock Exchange have promulgated compliance program rules. See NASD 
Rule 3010 and NYSE Rule 342, including Supplemental Material .30. 
Rule 17a-8 of the Exchange Act requires broker-dealers to comply 
with applicable BSA rules. Accordingly, broker-dealers will be 
required under existing rules to develop compliance programs for the 
broker-dealer SAR rule proposed in this document.

---------------------------------------------------------------------------

[[Page 44050]]

III. Notice of Proposed Rulemaking

    On December 31, 2001, FinCEN published a notice of proposed 
rulemaking (the ``Notice''), 66 FR 67670, that would extend the 
requirement to report suspicious transactions to broker-dealers. The 
comment period for the Notice ended on March 1, 2002. FinCEN received 
13 comment letters on the Notice. Of these, six were submitted by trade 
associations, two by financial holding companies, and one each by a 
mutual fund complex, bank, law firm, government agency, and compliance 
company.

IV. Summary of Comments and Revisions

A. Introduction

    The format of the final rule is generally consistent with the 
Notice. The terms of the final rule, however, differ from the terms of 
the Notice in the following significant respects:
     The categories of reportable activity have been 
streamlined and reorganized to clarify that all violations of law, 
other than those specifically exempted by the rule, are within the 
scope of required reporting;
     An exception from reporting relating to robbery or 
burglary has been added to the rule;
     Language has been added to clarify that only one report is 
required to be filed with respect to a reportable transaction, to avoid 
double reporting on the same transaction by, for example, an 
introducing broker and a clearing broker.

B. Comments--General Issues

    Comments on the Notice discussed several general matters including: 
(1) The appropriate degree of similarity between the rule and 
suspicious transaction reporting rules promulgated by the federal 
banking supervisory agencies under Title 12; (2) the exceptions from 
reporting for violations of securities laws and SRO rules; (3) the 
relationship of introducing and clearing brokers in the context of 
suspicious transaction reporting; (4) the application of the rule to 
entities that are dually registered as broker-dealers and futures 
commission merchants; (5) treatment of sellers of variable annuities 
under the rule; (6) application of the rule to registered broker-
dealers located outside the United States; and (7) application of only 
one set of suspicious transaction reporting rules to broker-dealer 
affiliates and subsidiaries of bank holding companies.
1. Similarity of the Rule With Title 12 Rules
    The Notice proposed requiring a broker-dealer to report two 
categories of transactions involving or aggregating at least $5,000. 
The first category consisted of known or suspected federal criminal 
violations when the broker-dealer is either an actual or potential 
victim of a criminal violation, or the broker-dealer is used to 
facilitate a criminal transaction. This category of transaction appears 
in the suspicious activity reporting rules currently applicable to 
depository institutions under Title 12 promulgated by the federal 
banking supervisory agencies, but does not appear in suspicious 
transaction reporting regulations promulgated by FinCEN under Title 31 
for banks and money services businesses (and proposed for casinos). The 
second category consisted of transactions that (1) involve illegally 
derived funds (money laundering), (2) appear designed for the purpose 
of evading BSA requirements, or (3) are unusual, either because they do 
not seem to be designed to make economic sense, or they are unusual for 
the particular customer. This second category of reportable 
transactions appears in both the Title 12 and Title 31 suspicious 
transaction reporting rules.
    Commenters raised several issues about the degree to which the rule 
proposed in the Notice should be harmonized with the Title 12 
suspicious transaction reporting rules. Several commenters argued that 
for the first category of reportable transactions, the final rule 
should adopt the three-tiered reporting threshold that appears in the 
Title 12 rules. Under the Title 12 rules, where a broker-dealer is 
either an actual or potential victim of a criminal violation, or the 
broker-dealer is used to facilitate a criminal transaction, the 
reporting threshold is zero for transactions involving insider abuse, 
and $5,000 for other types of transactions (or $25,000 if a suspect 
cannot be identified).
    The final rule does not adopt the three-tiered reporting threshold 
contained in the Title 12 rules. FinCEN's Title 31 SAR rule for banks 
does not contain a tiered reporting threshold. Rather, the reporting 
threshold in FinCEN's bank SAR rule is $5,000, regardless of the nature 
of the suspicious transaction required to be reported. Moreover, as the 
reporting of insider abuse largely has been carved out of this rule, 
FinCEN does not believe that it is necessary to adopt the Title 12 
threshold for transactions involving insider abuse. The final rule also 
does not adopt a $25,000 reporting threshold for transactions in which 
a broker-dealer cannot identify a suspect. First, broker-dealers 
operate in such a way that in most cases, the identity of their 
customers will be known to them. Second, the type of activity likely to 
be reported by a broker-dealer under circumstances where the broker-
dealer cannot identify the customer, such as identity theft or fraud, 
is the sort of activity that this rule is intended to capture, and its 
reporting should not be limited. Therefore, the reporting threshold for 
all categories of suspicious transactions required to be reported under 
the final rule is $5,000.
    One commenter argued that, in including the first category of 
reporting in the Notice, FinCEN exceeded its authority under Section 
5318(g) and the USA Patriot Act, contending that this category is not 
contained in the suspicious transaction reporting rules promulgated by 
FinCEN under Title 31 with respect to banks and money services 
businesses. As noted above, the USA Patriot Act imposes upon Treasury a 
deadline for publication of a final rule requiring broker-dealers to 
file suspicious transaction reports; the statutory authority under 
which Treasury implements suspicious transaction reporting rules is 
contained in 31 U.S.C. 5318(g)(2), which was enacted in 1992. That 
section authorizes the Secretary of the Treasury to require a financial 
institution to ``report any suspicious transaction relevant to a 
possible violation of law or regulation.'' Thus, it is within 
Treasury's authority to require the reporting of any suspected criminal 
activity occurring at a financial institution.
    Although the first category of reporting does not appear in other 
Title 31 suspicious transaction reporting rules, it was included in the 
Notice to ensure that transactions involving legally-derived funds that 
the broker-dealer suspects are being used for a criminal purpose (for 
example, transactions that the broker-dealer suspects are designed to 
fund terrorist activity) would be reported under the rule. Such 
transactions should be reported under language that already exists in 
the Title 31 rules. Each rule requires the reporting of a transaction 
that ``has no business or apparent lawful purpose.'' FinCEN believes 
that this broad language should be interpreted to require the reporting 
of transactions that appear unlawful for virtually any reason. 
Nevertheless, the Notice added the language in its first reporting 
category to make explicit that

[[Page 44051]]

transactions being carried out for the purpose of conducting illegal 
activities, whether or not funded from illegal activities, must be 
reported under the rule. The intent of including this category of 
reporting is to ensure reporting of situations in which a broker-dealer 
is being abused by a customer in furtherance of the customer's criminal 
activities. Because the comments showed some degree of confusion with 
the language in the first reporting category in the Notice, this 
category of reporting has been streamlined and re-organized, at 
paragraph (a)(2)(iv), to clarify that, subject to the explicit 
exceptions from reporting contained in paragraph (c) of the final rule 
(relating to robbery, burglary, lost, missing, counterfeit, or stolen 
securities, and violations of the federal securities law or rules of an 
SRO), all criminal violations are required to be reported under the 
final rule.\11\
---------------------------------------------------------------------------

    \11\ Two commenters requested that the final rule harmonize 
penalty provisions relating to this category of reportable activity 
with the penalty provisions applicable to the reporting of such 
transactions under Title 12. However, the penalties applicable in 
instances of failure to comply with the requirement contained in 
this rule are mandated by statute, and cannot be modified by FinCEN. 
See 31 U.S.C. 5321 and 5322.
---------------------------------------------------------------------------

    The second category of reportable transactions in the Notice 
requires a broker-dealer to report transactions if the broker-dealer 
knows, suspects, or has reason to suspect that the transaction (or 
pattern of transactions of which the transaction is a part) falls 
within one of the three classes explained above. Some commenters argued 
that the language referring to the reporting of patterns of 
transactions should be deleted from the rule, urging that it would be 
unfair to require broker-dealers to report patterns of suspicious 
transactions, given that the Title 12 and Title 31 suspicious 
transaction reporting rules applicable to banks do not contain language 
relating to patterns of suspicious transactions.
    The language in the rule requiring the reporting of patterns of 
transactions is not intended to impose an additional reporting burden 
on broker-dealers. Rather, it is intended to recognize the fact that a 
transaction may not always appear suspicious standing alone. In some 
cases, a broker-dealer may only be able to determine that a suspicious 
transaction report must be filed after reviewing its records, either 
for the purposes of monitoring for suspicious transactions, auditing 
its compliance systems, or during some other review. The language 
relating to patterns of transactions is intended to make explicit the 
requirement that FinCEN believes implicitly exists in the suspicious 
transaction reporting rules for banks: if a broker-dealer determines 
that a series of transactions that would not independently trigger the 
suspicion of the broker-dealer, but that taken together, form a 
suspicious pattern of activity, the broker-dealer must file a 
suspicious transaction report.\12\ For this reason, the pattern of 
transactions language has been retained in the final rule.
---------------------------------------------------------------------------

    \12\ Indeed, broker-dealers are experienced in reviewing 
patterns or series of transactions under the federal securities laws 
for the purpose of identifying securities law violations. See, e.g., 
15 U.S.C. 78i(a).
---------------------------------------------------------------------------

2. Exceptions From Reporting
    Several commenters raised issues relating to the exceptions from 
reporting contained in the Notice. Although generally supporting the 
exception from reporting relating to violations of federal securities 
laws or SRO rules by the broker-dealer or any of its associated 
persons, commenters argued that the exception should not contain a 
condition requiring a broker-dealer to report the violation to the SEC 
or an SRO. Commenters argued that existing SEC regulations and SRO 
rules do not require that all securities violations be reported to the 
SEC or an SRO, and that the requirement to report suspicious activity 
to Treasury should not encompass such violations. In addition, 
commenters suggested that the exception should be broadened to cover 
securities law violations by a customer of the broker-dealer.
    Because the suspicious activity reporting regime established by the 
final rule implicates a broad array of law enforcement concerns, the 
exception from reporting has not been expanded. The SEC and SROs 
already have established a regulatory structure for reporting and 
maintaining data about securities law violations by broker-dealers. It 
is not FinCEN's intent in promulgating the final rule to duplicate 
these efforts. The exception continues to permit a broker-dealer to 
handle the reporting of a violation of securities laws or rules by the 
broker-dealer (or any of its officers, directors, employees, or other 
registered representatives) under existing industry procedures (whether 
formal or informal) rather than through a Suspicious Activity Report `` 
Brokers or Dealers in Securities (``SAR-BD''). If a broker-dealer does 
not in fact report under existing securities industry procedures a 
violation of securities law or rules by the broker-dealer or any of its 
associated persons that otherwise would be required to be reported 
under the terms of the final rule, even in situations in which the 
rules of the SEC or an SRO would not require a broker-dealer to report 
such a transaction, the broker-dealer must file a SAR-BD. The final 
rule continues to provide that the exception from reporting does not 
apply if the securities law or SRO rule violation is a violation of 17 
CFR 240.17a-8 or 17 CFR 405.4 (the regulations that require broker-
dealers and government securities broker-dealers, respectively, to 
comply with the BSA rules). In these situations, the broker-dealer is 
to report the violation on a SAR-BD.
    In response to comments requesting clarification that the language 
in the exception alters neither the standard for reporting suspicious 
activity to Treasury, nor any reporting requirements of the SEC or an 
SRO, the exception to reporting no longer applies to ``possible'' 
violations of securities laws or rules. Instead, the exception applies 
to a ``violation otherwise required to be reported'' on a SAR-BD that 
is a violation of securities laws or rules. Thus, the exception applies 
to a transaction that a broker-dealer knows, suspects, or has reason to 
suspect involves a violation by a broker-dealer or any of its 
associated persons of securities laws or rules, or rules of an SRO, so 
long as the broker-dealer in fact reports the transaction under 
existing securities industry procedures. Finally, one commenter 
suggested that the rule should contain an exception for reporting in 
the case of a robbery or burglary that is reported by the broker-dealer 
to appropriate authorities, noting that the suspicious activity 
reporting rules applicable to banks contain such an exception. The 
final rule adopts this suggestion.
3. Introducing and Clearing Brokers
    Securities transactions may be conducted by broker-dealers that 
clear their own transactions or by introducing brokers that rely on 
another firm to clear the transactions. Several commenters recommended 
that the final rule address the requirement to file a suspicious 
activity report when both an introducing and clearing broker are 
involved in a transaction. In particular, the commenters requested that 
the final rule provide that only one suspicious activity report is 
required to be filed in this situation. The final rule provides that 
the obligation to identify and report a suspicious transaction rests 
with each broker-dealer involved in the transaction, but that only one 
SAR-BD is required to be filed, provided that the report includes all 
the relevant facts concerning the transaction. It is

[[Page 44052]]

FinCEN's expectation that introducing and clearing broker-dealers 
wishing to take advantage of this provision with respect to a 
particular transaction will communicate with each other about the 
transaction for purposes of sharing information about the transaction, 
and determining which broker-dealer will file the SAR. In cases in 
which such communication is appropriate and results in the filing of a 
SAR, the broker-dealer that has actually filed that SAR may share with 
the broker-dealer with which the communication was had under paragraph 
(a)(3), a copy of the filed SAR. However, the limitations found in 31 
U.S.C. 5318(g)(2) on further dissemination of the SAR-BD and disclosure 
of the fact of its filing apply equally to both broker-dealers. 
Moreover, in certain instances, communication between two broker-
dealers about a suspicious transaction and the fact of filing of a SAR-
BD would be inappropriate. For example, a broker-dealer that suspects 
that it is required to report another broker-dealer or one of its 
employees as the subject of a SAR would be prohibited from notifying 
the other broker-dealer that a SAR has been filed, because to do so 
would reveal, or risk revealing, to the subject of a SAR that a SAR has 
been filed.
    The purpose of including this provision in the rule is to allow two 
broker-dealers that have participated in the same transaction to file 
only one SAR-BD. In addition, section 314(b) of the USA Patriot Act 
permits two or more financial institutions and any association of 
financial institutions upon notice to Treasury to ``share information 
with one another regarding individuals, entities, organizations, and 
countries suspected of possible terrorist or money laundering 
activities.'' On March 4, 2002, FinCEN promulgated an Interim rule and 
Notice of Proposed Rulemaking relating to information sharing under 
section 314(b).\13\ Language in section 314(b) protects financial 
institutions disclosing information in accordance with the statutory 
provision or regulations promulgated thereunder, from liability for 
such disclosures or for failure to provide notice of such disclosures 
to the person who is the subject of the disclosure.
---------------------------------------------------------------------------

    \13\ The Interim rule appears at 67 FR 9874 (March 4, 2002), and 
the Notice of Proposed Rulemaking appears at 67 FR 9879 (March 4, 
2002).
---------------------------------------------------------------------------

4. Futures Commission Merchants
    Several commenters raised issues about the application of the 
Notice to the futures and options activities of dual registrants--
persons registered both with the Commodity Futures Trading Commission 
(``CFTC'') as a futures commission merchant (``FCM'') and with the SEC 
as a broker-dealer. According to the commenters, the Notice creates an 
ambiguity concerning the extent to which dual registrants are subject 
to the proposed suspicious transaction reporting rule. The Notice 
applies to transactions by, at, or through a broker-dealer, and while 
the terms of the Notice defining ``transaction'' do not specifically 
address a contract of sale of a commodity for future delivery or 
commodity option, the language of that definition, the commenters 
argued, makes it unclear whether the futures and options activities of 
dual registrants are covered. The commenters, citing section 356(b) of 
the USA Patriot Act,\14\ recommended that FinCEN proceed with a 
separate rulemaking specifically for FCMs if it wishes to subject the 
futures and options activities of dual registrants to suspicious 
transaction reporting. In response to the comments, FinCEN wishes to 
clarify that the final rule does not apply to dual registrants to the 
extent of their activities subject to the exclusive jurisdiction of the 
CFTC. (The final rule does apply, however, to activities of dual 
registrants involving securities futures products, and to any other 
products over which the SEC or another federal agency also has 
jurisdiction, because such products are not subject to the CFTC's 
exclusive jurisdiction.)
---------------------------------------------------------------------------

    \14\ Section 356(b) provides that the Secretary, in consultation 
with the CFTC, may prescribe regulations requiring FCMs (and 
commodity trading advisors and commodity pool operators) registered 
under the Commodity Exchange Act to submit suspicious transaction 
reports under 31 U.S.C. 5381(g). Treasury is currently consulting 
with the CFTC about such regulations.
---------------------------------------------------------------------------

5. Persons Selling Variable Annuities
    As explained in the Notice, persons required to register as broker-
dealers solely to permit the sale of variable annuities of life 
insurance companies will be required to report suspicious transactions. 
(See 66 FR 67672.) In 1972, Treasury granted such persons an exemption 
from the provisions of 31 CFR part 103 (See 37 FR 248986, 248988, 
November 23, 1972). This exemption will be withdrawn in a separate 
document published in the Federal Register. As a result, a person 
registered with the SEC as a broker-dealer solely to offer and sell 
variable annuity contracts issued by life insurance companies will be 
subject to the suspicious activity reporting rules of 31 CFR 103.19 and 
all other BSA requirements to the extent they offer and sell such 
contracts.
6. Broker-Dealers Outside the United States
    The Notice relies on the definition of broker-dealer in existing 31 
CFR 103.11(f)--any ``broker or dealer in securities, registered or 
required to be registered with the Securities and Exchange Commission 
under the Securities Exchange Act of 1934.'' As a result, one commenter 
requested that the final rule clarify that the new suspicious 
transaction rule does not apply to broker-dealers registered with the 
SEC but located outside the United States. The final rule makes the 
requested clarification.
7. Broker-Dealer Affiliates or Subsidiaries of Banks and Bank Holding 
Companies
    As explained above, broker-dealers that are affiliates or 
subsidiaries of banks or bank holding companies are already required to 
report suspicious transactions under the Title 12 rules promulgated by 
the banking supervisory agencies. In order to ensure that broker-
dealers are only subject to one suspicious transaction reporting 
requirement, FinCEN has requested that the federal banking supervisory 
agencies amend their regulations to exempt broker-dealers from having 
to report suspicious transactions under Title 12 rules.
    One commenter asked that the final rule amend 31 CFR 103.18, which 
requires banks to report suspicious transactions, to make that rule 
inapplicable to broker-dealer affiliates of banks. This is unnecessary. 
The part 103 rules do not look to the status of a parent company in a 
bank holding company group for the purpose of determining what rules a 
company owned by the parent must apply. For example, the part 103 rules 
do not treat non-bank subsidiaries of bank holding companies as falling 
within the definition of bank for purposes of the part 103 regulations. 
Thus, a broker-dealer affiliate or subsidiary of a bank or bank holding 
company is subject to the suspicious transaction reporting rules in 31 
CFR 103.19, rather than the rules applicable to depository institutions 
in 31 CFR 103.18.

V. Section-by-Section Analysis

A. 103.11(ii)--Transaction

    The final rule amends the definition of ``transaction'' in the BSA 
regulations explicitly to include the term ``security,'' itself defined 
in new paragraph 103.11(ww) as explained

[[Page 44053]]

below. Some commenters argued that the definition of ``transaction'' 
should be changed to make it identical to the definition of 
``transaction'' that appears in the suspicious transaction reporting 
rules promulgated by the federal banking supervisory agencies.\15\ 
However, the definition of transaction contained in paragraph 
103.11(ii) applies to all the requirements of, and entities subject to, 
the BSA regulations found in 31 CFR part 103, and FinCEN does not 
believe that it would be appropriate to make such a far-reaching change 
in order to reflect the definitional language in a different title that 
is administered by other agencies. As banks already must comply with 
the BSA obligations of 31 CFR part 103 pursuant to its definition of 
``transaction,'' there will be no discrepancy in the treatment of 
regulated entities by retaining this definition.
---------------------------------------------------------------------------

    \15\ See, e.g., 12 CFR 208.62(c)(4), defining ``transaction'' 
for purposes of reporting potential money laundering, violations of 
the BSA, or transactions with no business or apparent lawful 
purpose, as ``a deposit, withdrawal, transfer between accounts, 
exchange of currency, loan, extension of credit, purchase or sale of 
any stock, bond, certificate of deposit, or other monetary 
instrument or investment security, or any other payment, transfer, 
or delivery by, through, or to a financial institution, by whatever 
means effected.''
---------------------------------------------------------------------------

B. 103.11(ww)--Security

    The final rule adds a definition of ``security'' to 31 CFR part 103 
that includes any instrument or interest that falls within the 
definition of ``security'' in section (3)(a)(10) of the Securities 
Exchange Act of 1934, 15 U.S.C. 78c(a)(10). The addition of a 
definition of ``security'' to the BSA regulations, and the 
corresponding addition of this term to the definition of 
``transaction'' contained in paragraph 103.11(ii), is necessary to 
ensure that the reporting requirement conforms to the definition of 
``broker or dealer in securities'' contained in 31 CFR 103.11(f), so as 
to cover all activity that should be reported under the rule.

C. 103.19(a)--Reports by Broker-Dealers of Suspicious Transactions--
General

    Paragraph 103.19(a)(1) generally sets forth the requirement that 
broker-dealers located within the United States report suspicious 
transactions to the Department of the Treasury. The paragraph also 
permits, but does not require, a broker-dealer voluntarily to file a 
suspicious transaction report in situations in which mandatory 
reporting is not required. In light of the definition of ``broker or 
dealer in securities'' in 31 CFR 103.11(f), reporting would be required 
by any:

Broker or dealer in securities, registered or required to be 
registered with the Securities and Exchange Commission under the 
Securities Exchange Act of 1934.

In response to a comment about the scope of this definition, FinCEN 
wishes to clarify that this definition covers brokers and dealers 
registered or required to be registered with the SEC, whether under 
section 15, 15B, or 15C(a)(1)(A) of the Securities and Exchange Act of 
1934.\16\
---------------------------------------------------------------------------

    \16\ The preamble of the Notice provided specific citations to 
the definitions of ``broker,'' ``dealer,'' and ``security'' under 
the Securities and Exchange Act of 1934 for illustrative purposes 
only, and not to limit in any way the scope of the definition found 
at 31 CFR 103.11(f).
---------------------------------------------------------------------------

    Paragraph (a)(2) provides that a transaction requires reporting 
under the rule if it is conducted or attempted by, at, or through a 
broker-dealer, involves or aggregates at least $5,000 in funds or other 
assets (such as securities), and the broker-dealer knows, suspects, or 
has reason to suspect that the transaction falls within one of four 
categories of transactions. It should be noted that transactions 
require reporting under the final rule whether or not they involve 
currency.
1. Dollar Threshold for Reporting
    The final rule continues to require reporting of suspicious 
transactions of at least $5,000. As the Notice explained, the rule is 
not intended to require broker-dealers mechanically to review every 
transaction that exceeds the reporting threshold. Rather, it is 
intended that broker-dealers, and indeed every type of financial 
institution to which the suspicious transaction reporting rules of 31 
CFR part 103 apply, will evaluate customer activity and relationships 
for money laundering risks, and design a suspicious transaction 
monitoring program that is appropriate for the particular broker-dealer 
in light of such risks. In other words, it is expected that broker-
dealers will follow a risk-based approach in monitoring for suspicious 
transactions, and will report all detected suspicious transactions that 
involve $5,000 or more in funds or other assets.
2. Reporting Standard
    Paragraph (a)(2) requires reporting if a broker-dealer ``knows, 
suspects, or has reason to suspect'' that a transaction requires 
reporting under the rule. This reporting standard reflects a concept of 
due diligence in the reporting requirement. One commenter argued that 
the ``has reason to suspect'' language should be removed, and that the 
issue of due diligence should be addressed as a matter of assessing the 
adequacy of a broker-dealer's anti-money laundering compliance program. 
The final rule retains the ``has reason to suspect'' language. FinCEN 
believes that compliance with the rule cannot be adequately enforced 
without an objective standard. The reason-to-suspect standard means 
that, on the facts existing at the time, a reasonable broker-dealer in 
similar circumstances would have suspected the transaction was subject 
to SAR reporting. This is a flexible standard that adequately takes 
into account the differences in operating realities among various types 
of broker-dealers, and is the standard contained in the existing SAR 
rules for depository institutions and money services businesses. A 
regulator's review of the adequacy of a broker-dealer's anti-money 
laundering compliance program is not a substitute for, although it 
could be relevant to, an inquiry into the failure of a broker-dealer to 
report a particular suspicious transaction.
3. Scope of Reporting
    Paragraph (a)(2) contains four categories of reportable 
transactions. The first category, described in paragraph (a)(2)(i), 
includes transactions involving funds derived from illegal activity or 
intended or conducted to hide or disguise funds or assets derived from 
illegal activity. The second category, described in paragraph 
(a)(2)(ii), involves transactions designed, whether through structuring 
or other means, to evade the requirements of the BSA. The third 
category, described in paragraph (a)(2)(iii), involves transactions 
that appear to serve no business or apparent lawful purpose or are not 
the sort of transactions in which the particular customer would be 
expected to engage, and for which the broker-dealer knows of no 
reasonable explanation after examining the available facts. The fourth 
category, described in paragraph (a)(2)(iv), involves the use of the 
broker-dealer to facilitate criminal activity. As explained above, the 
fourth category of reportable transactions is intended to cover 
transactions intended to further a criminal purpose, but apparently 
involving legally-derived funds.
    One commenter argued that the requirement to report transactions 
that are unusual for the particular customer should be removed, because 
it is overly burdensome to require a broker-dealer to report 
transactions that could not definitively be linked to wrongdoing. 
However, FinCEN believes that it is appropriate to include transactions 
that vary so substantially from normal practice that they legitimately 
can and should raise suspicions of possible

[[Page 44054]]

illegality. For a discussion of this category as a ``red flag,'' see 
NASD Notice to Members 02-21, NASD Provides Guidance to Member Firms 
Concerning Anti-Money Laundering Compliance Programs Required by 
Federal Law (April 2, 2002), available on the NASD Web site, http://www.nasd.com.
    Several commenters requested that FinCEN clarify that the rule does 
not require the reporting of suspected violations of state or foreign 
law. The final rule does not exclude the reporting of all violations of 
state law (rather, as explained below, certain state law crimes, such 
as burglary, have been specifically excepted from the reporting 
requirement). The final rule also does not explicitly carve out the 
reporting of suspected violations of foreign law. Particularly with 
respect to fraud and money laundering, it would be difficult for a 
broker-dealer to determine whether the suspected illegal activity 
involved in the transaction related to violations of state or foreign 
law. Moreover, violation of state law, or even foreign law, can be 
relevant to federal crimes, especially in money laundering cases 
brought under 18 U.S.C. 1956, 1957, or 1960, in which violations of 
state or foreign law may serve as a predicate for a federal offense.
4. Allocation of Responsibility for Reporting
    As noted above, paragraph (a)(3) provides that the obligation to 
identify and report a suspicious transaction rests with each broker-
dealer involved in the transaction, but only one SAR-BD is required to 
be filed, provided that the report includes all the relevant facts 
concerning the transaction. Guidance issued by the NASD addresses the 
need for introducing and clearing firms to make information available 
to one another for purposes of suspicious activity reporting.\17\ In 
addition, it should be noted that the final rule does not require a 
broker-dealer to alter its relationship with its customers in a way 
that is inconsistent with industry practice. For example, commenters 
expressed concern that certain entities covered by the rule (e.g., 
clearing brokers), which may not have the same level of knowledge with 
respect to their customers as other entities covered by the rule would 
normally be expected to have, would be expected to re-structure their 
relationships with customers in order to comply with the rule. FinCEN 
recognizes that, based on the nature of the services they provide to 
their customers, certain types of broker-dealers will have more 
information available to them in making such determinations than other 
types of broker-dealers.\18\ The rule is intended to adjust to the 
different operating realities found in different types of financial 
institutions.
---------------------------------------------------------------------------

    \17\ See NASD Notice to Members 02-21.
    \18\ Customer identification and verification requirements will 
be dealt with in forthcoming rules to be issued under section 326 of 
the USA Patriot Act.
---------------------------------------------------------------------------

D. 103.19(b)--Filing Procedures

    Paragraph (b) continues to set forth the filing procedures to be 
followed by broker-dealers making reports of suspicious transactions. 
Within 30 days after a broker-dealer becomes aware of a suspicious 
transaction, the broker-dealer must report the transaction by 
completing a SAR-BD and filing it in a central location, to be 
determined by FinCEN. Some commenters requested that broker-dealers be 
permitted to use the suspicious transaction reporting form currently 
used by banks, because many broker-dealers are already familiar with 
the form, having used it to file SARs either on a voluntary basis, or 
as required under the federal banking supervisory rules. However, 
FinCEN believes that a reporting form tailored to the broker-dealer 
industry will promote better reporting and result in a more useful 
collection of information.
    If a broker-dealer is unable to identify a suspect on the date the 
suspicious transaction is initially detected, the rule provides the 
broker-dealer with an additional 30 calendar days to identify the 
suspect before filing a SAR-BD, but the suspicious transaction must be 
reported within 60 calendar days after the date of initial detection of 
the suspicious transaction, whether or not the broker-dealer is able to 
identify a suspect.
    One commenter suggested that it is overly burdensome to require a 
broker-dealer, in situations involving violations requiring immediate 
attention, to notify by telephone both an appropriate law enforcement 
authority and the SEC. To accommodate this concern, the final rule 
requires a broker-dealer to immediately notify by telephone an 
appropriate law enforcement authority only in situations that require 
immediate attention, such as terrorist financing or ongoing money 
laundering schemes. Broker-dealers may also, but are not required to, 
contact the SEC in such situations. In addition, the rule reminds 
broker-dealers of FinCEN's Financial Institutions Hotline (1-866-556-
3974) for use by financial institutions wishing voluntarily to report 
to law enforcement suspicious transactions that may relate to terrorist 
activity. Broker-dealers reporting suspicious activity by calling the 
Financial Institutions Hotline must still file a timely SAR-BD to the 
extent required by the final rule.

E. 103.19(c)--Exceptions

    Paragraph (c) contains exceptions from the reporting requirement. 
Paragraph (c)(1)(i) provides that a broker-dealer is not required to 
report under the final rule a robbery or burglary that the broker-
dealer reports to an appropriate law enforcement authority, or lost, 
missing, counterfeit, or stolen securities that the broker-dealers 
reports in accordance with existing SEC rules. Paragraph (c)(1)(ii) 
permits the reporting of a violation of federal securities laws or 
rules of an SRO by a broker-dealer or any of its associated persons 
under existing industry procedures rather than through a SAR-BD. The 
exception does not apply, however, if the securities law or SRO rule 
violation is a violation of 17 CFR 240.17a-8 or 17 CFR 405.4. Such 
violations must be reported on a SAR-BD.

F. 103.19(d)--Retention of Records

    Paragraph (d) continues to provide that broker-dealers must 
maintain copies of SAR-BDs they file and the original related 
documentation (or business record equivalent) for a period of five 
years from the date of filing. Supporting documentation is to be made 
available to FinCEN, appropriate law enforcement authorities or federal 
securities regulators, or an SRO registered with the SEC for purposes 
of examining the broker-dealer for compliance with this rule.

G. 103.19(e)--Confidentiality of Reports

    Paragraph (e) continues to incorporate the terms of 31 U.S.C. 
5318(g)(2) and (g)(3). Thus, this paragraph specifically prohibits 
persons filing reports in compliance with the final rule from 
disclosing, except to FinCEN, the SEC, or another appropriate law 
enforcement or regulatory agency, or an SRO registered with the SEC 
conducting an examination of the broker-dealer for compliance with the 
final rule, that a report has been filed or from providing any 
information that would disclose that a report has been prepared or 
filed. This paragraph does not prohibit an introducing broker and a 
clearing broker from discussing with each other, for purposes of 
paragraph (a)(3), suspicious activity involving a transaction with 
respect to which both broker-dealers have been involved, and the 
determination which broker-dealer will file the SAR in such a case. In 
addition,

[[Page 44055]]

as noted above, section 314(b) of the USA Patriot Act permits financial 
institutions, upon providing notice to Treasury, to share information 
with one another solely for the purpose of identifying and reporting to 
the federal government activities that may involve money laundering or 
terrorist activity.

H. 103.19(f)--Limitation of Liability

    Paragraph (f) continues to restate the broad protection from 
liability for making reports of suspicious transactions (whether such 
reports are required by the final rule or made voluntarily), and for 
failure to disclose the fact of such reporting, contained in the 
statute as amended by the USA Patriot Act. The paragraph reflects 
amendments to the statutory safe harbor that were made under section 
351 of the USA Patriot Act, including specific application of the safe 
harbor to voluntary reports of suspicious transactions, and 
availability of the safe harbor in the arbitration of securities 
industry disputes. The regulatory provisions do not extend the scope of 
either the statutory prohibition or the statutory protection; however, 
because FinCEN recognizes the importance of these statutory provisions 
in the overall effort to encourage meaningful reports of suspicious 
transactions and to protect the legitimate privacy expectations of 
those who may be named in such reports, they are repeated in the rule 
to remind compliance officers and others of their existence.

I. 103.19(g)--Examination and Enforcement

    Paragraph (g) continues to provide that compliance with the rule 
will be examined by FinCEN or its delegees,\19\ and that a broker-
dealer must provide copies of a filed SAR-BD to an SRO registered with 
the SEC that is examining a broker-dealer for compliance with the rule.
---------------------------------------------------------------------------

    \19\ See 31 CFR 103.56(b)(6) (delegating examination authority 
for broker-dealers to the SEC).
---------------------------------------------------------------------------

J. 103.19(h)--Effective Date

    Paragraph (h) continues to provide a 180-day period before which 
compliance with the final rule will become mandatory. Broker-dealers 
required to comply with suspicious transaction reporting rules 
promulgated by the federal banking supervisory agencies should continue 
complying with such requirements until reporting under the terms of 
this final rule is required. Two commenters requested that FinCEN 
create a mechanism for broker-dealers to request an extension of the 
effective date of the final rule. Given the 180-day period before 
compliance with the requirement is required under the rule, FinCEN does 
not believe such a procedure is necessary.

VI. Executive Order 12866

    The Department of the Treasury has determined that this proposed 
rule is not a significant regulatory action under Executive Order 
12866.

VII. Regulatory Flexibility Act

    FinCEN certifies that this proposed regulation will not have a 
significant economic impact on a substantial number of small entities. 
All broker-dealers, regardless of their size, are currently subject to 
the BSA. Procedures currently in place at broker-dealers to comply with 
existing BSA rules should help broker-dealers identity suspicious 
transactions. Finally, certain small broker-dealers may have an 
established and limited customer base whose transactions are well-known 
to the broker dealer.

VIII. Paperwork Reduction Act

    The collection of information contained in this final regulation 
has been approved by the Office of Management and Budget (``OMB'') in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) 
under control number 1506-0019. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a valid control number assigned by OMB.
    The collection of information in this final rule is in 31 CFR 
103.19(d). This information is required to be provided pursuant to 31 
U.S.C. 5318(g) and 31 CFR 103.20. This information will be used by law 
enforcement agencies in the enforcement of criminal and regulatory 
laws. The collection of information is mandatory. The likely 
recordkeepers are businesses.
    The estimated average recordkeeping burden associated with the 
collection of information in this final rule is four hours per 
recordkeeper. Although the estimated average recordkeeping burden 
contained in the Notice was three hours, the burden has been revised in 
response to a comment arguing that the estimate should better reflect 
the amount of time involved in analyzing whether complex transactions 
require reporting under the rule. This burden relates to the 
recordkeeping requirement contained in the final rule. The reporting 
burden of 31 CFR 103.19 will be reflected in the burden of the form, 
SAR-BD.
    FinCEN anticipates that the final rule will result in an annual 
filing of a total of 2,000 SAR-BD forms. This result is an estimate 
extrapolated from the number of suspicious activity reports currently 
being filed by the broker-dealer industry either on a mandatory basis 
under the bank supervisory agency rules or voluntarily. One commenter 
suggested that this estimate is too low. FinCEN will monitor the filing 
of Suspicious Activity Report--BD under the final rule in order to 
determine whether this number should be revised.
    Comments concerning the accuracy of this burden estimate should be 
directed to the Financial Crimes Enforcement Network, Department of the 
Treasury, Post Office Box 39, Vienna, VA 22183, and to the Office of 
Management and Budget, Attn: Alexander T. Hunt, Office of Information 
and Regulatory Affairs, Office of Management and Budget, New Executive 
Office Building, Room 3208, Washington, DC 20503.

List of Subjects in 31 CFR Part 103

    Authority delegations (Government agencies), Banks, banking, 
Currency, Investigations, Law enforcement, Reporting and recordkeeping 
requirements.

Amendments to the Regulations

    For the reasons set forth above in the preamble, 31 CFR part 103 is 
amended as follows:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FOREIGN TRANSACTIONS

    1. The authority citation for part 103 continues to read as 
follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5332; 
title III, secs. 314, 352, Pub. L. 107-56, 115 Stat. 307.


    2. In Sec. 103.11, paragraph (ii)(1) is revised and new paragraph 
(ww) is added to read as follows:


Sec. 103.11  Meaning of terms.

* * * * *
    (ii) Transaction. (1) Except as provided in paragraph (ii)(2) of 
this section, transaction means a purchase, sale, loan, pledge, gift, 
transfer, delivery, or other disposition, and with respect to a 
financial institution includes a deposit, withdrawal, transfer between 
accounts, exchange of currency, loan, extension of credit, purchase or 
sale of any stock, bond, certificate of deposit, or other monetary 
instrument or security, purchase or redemption of any money order, 
payment or order for any money remittance or transfer, or any other 
payment, transfer, or delivery by,

[[Page 44056]]

through, or to a financial institution, by whatever means effected.
* * * * *
    (ww) Security. Security means any instrument or interest described 
in section 3(a)(10) of the Securities Exchange Act of 1934, 15 U.S.C. 
78c(a)(10).

    3. In Subpart B, add new Sec. 103.19 to read as follows:


Sec. 103.19  Reports by brokers or dealers in securities of suspicious 
transactions.

    (a) General. (1) Every broker or dealer in securities within the 
United States (for purposes of this section, a ``broker-dealer'') shall 
file with FinCEN, to the extent and in the manner required by this 
section, a report of any suspicious transaction relevant to a possible 
violation of law or regulation. A broker-dealer may also file with 
FinCEN a report of any suspicious transaction that it believes is 
relevant to the possible violation of any law or regulation but whose 
reporting is not required by this section. Filing a report of a 
suspicious transaction does not relieve a broker-dealer from the 
responsibility of complying with any other reporting requirements 
imposed by the Securities and Exchange Commission or a self-regulatory 
organization (``SRO'') (as defined in section 3(a)(26) of the 
Securities Exchange Act of 1934, 15 U.S.C. 78c(a)(26)).
    (2) A transaction requires reporting under the terms of this 
section if it is conducted or attempted by, at, or through a broker-
dealer, it involves or aggregates funds or other assets of at least 
$5,000, and the broker-dealer knows, suspects, or has reason to suspect 
that the transaction (or a pattern of transactions of which the 
transaction is a part):
    (i) Involves funds derived from illegal activity or is intended or 
conducted in order to hide or disguise funds or assets derived from 
illegal activity (including, without limitation, the ownership, nature, 
source, location, or control of such funds or assets) as part of a plan 
to violate or evade any federal law or regulation or to avoid any 
transaction reporting requirement under federal law or regulation;
    (ii) Is designed, whether through structuring or other means, to 
evade any requirements of this part or of any other regulations 
promulgated under the Bank Secrecy Act, Public Law 91-508, as amended, 
codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-
5332;
    (iii) Has no business or apparent lawful purpose or is not the sort 
in which the particular customer would normally be expected to engage, 
and the broker-dealer knows of no reasonable explanation for the 
transaction after examining the available facts, including the 
background and possible purpose of the transaction; or
    (iv) Involves use of the broker-dealer to facilitate criminal 
activity.
    (3) The obligation to identify and properly and timely to report a 
suspicious transaction rests with each broker-dealer involved in the 
transaction, provided that no more than one report is required to be 
filed by the broker-dealers involved in a particular transaction (so 
long as the report filed contains all relevant facts).
    (b) Filing procedures--(1) What to file. A suspicious transaction 
shall be reported by completing a Suspicious Activity Report--Brokers 
or Dealers in Securities (``SAR-BD''), and collecting and maintaining 
supporting documentation as required by paragraph (d) of this section.
    (2) Where to file. The SAR-BD shall be filed with FinCEN in a 
central location, to be determined by FinCEN, as indicated in the 
instructions to the SAR-BD.
    (3) When to file. A SAR-BD shall be filed no later than 30 calendar 
days after the date of the initial detection by the reporting broker-
dealer of facts that may constitute a basis for filing a SAR-BD under 
this section. If no suspect is identified on the date of such initial 
detection, a broker-dealer may delay filing a SAR-BD for an additional 
30 calendar days to identify a suspect, but in no case shall reporting 
be delayed more than 60 calendar days after the date of such initial 
detection. In situations involving violations that require immediate 
attention, such as terrorist financing or ongoing money laundering 
schemes, the broker-dealer shall immediately notify by telephone an 
appropriate law enforcement authority in addition to filing timely a 
SAR-BD. Broker-dealers wishing voluntarily to report suspicious 
transactions that may relate to terrorist activity may call FinCEN's 
Financial Institutions Hotline at 1-866-556-3974 in addition to filing 
timely a SAR-BD if required by this section. The broker-dealer may 
also, but is not required to, contact the Securities and Exchange 
Commission to report in such situations.
    (c) Exceptions. (1) A broker-dealer is not required to file a SAR-
BD to report:
    (i) A robbery or burglary committed or attempted of the broker-
dealer that is reported to appropriate law enforcement authorities, or 
for lost, missing, counterfeit, or stolen securities with respect to 
which the broker-dealer files a report pursuant to the reporting 
requirements of 17 CFR 240.17f-1;
    (ii) A violation otherwise required to be reported under this 
section of any of the federal securities laws or rules of an SRO by the 
broker-dealer or any of its officers, directors, employees, or other 
registered representatives, other than a violation of 17 CFR 240.17a-8 
or 17 CFR 405.4, so long as such violation is appropriately reported to 
the SEC or an SRO.
    (2) A broker-dealer may be required to demonstrate that it has 
relied on an exception in paragraph (c)(1) of this section, and must 
maintain records of its determinations to do so for the period 
specified in paragraph (d) of this section. To the extent that a Form 
RE-3, Form U-4, or Form U-5 concerning the transaction is filed 
consistent with the SRO rules, a copy of that form will be a sufficient 
record for purposes of this paragraph (c)(2).
    (3) For the purposes of this paragraph (c) the term ``federal 
securities laws'' means the ``securities laws,'' as that term is 
defined in section 3(a)(47) of the Securities Exchange Act of 1934, 15 
U.S.C. 78c(a)(47), and the rules and regulations promulgated by the 
Securities and Exchange Commission under such laws.
    (d) Retention of records. A broker-dealer shall maintain a copy of 
any SAR-BD filed and the original or business record equivalent of any 
supporting documentation for a period of five years from the date of 
filing the SAR-BD. Supporting documentation shall be identified as such 
and maintained by the broker-dealer, and shall be deemed to have been 
filed with the SAR-BD. A broker-dealer shall make all supporting 
documentation available to FinCEN, any other appropriate law 
enforcement agencies or federal or state securities regulators, and for 
purposes of paragraph (g) of this section, to an SRO registered with 
the Securities and Exchange Commission, upon request.
    (e) Confidentiality of reports. No financial institution, and no 
director, officer, employee, or agent of any financial institution, who 
reports a suspicious transaction under this part, may notify any person 
involved in the transaction that the transaction has been reported, 
except to the extent permitted by paragraph (a)(3) of this section. 
Thus, any person subpoenaed or otherwise requested to disclose a SAR-BD 
or the information contained in a SAR-BD, except where such disclosure 
is requested by FinCEN, the Securities and Exchange Commission, or 
another appropriate law enforcement or regulatory agency, or for 
purposes of paragraph (g) of this section, an SRO registered with the 
Securities and Exchange Commission, shall decline to

[[Page 44057]]

produce the SAR-BD or to provide any information that would disclose 
that a SAR-BD has been prepared or filed, citing this paragraph (e) and 
31 U.S.C. 5318(g)(2), and shall notify FinCEN of any such request and 
its response thereto.
    (f) Limitation of liability. A broker-dealer, and any director, 
officer, employee, or agent of such broker-dealer, that makes a report 
of any possible violation of law or regulation pursuant to this section 
or any other authority (or voluntarily) shall not be liable to any 
person under any law or regulation of the United States (or otherwise 
to the extent also provided in 31 U.S.C. 5318(g)(3), including in any 
arbitration proceeding) for any disclosure contained in, or for failure 
to disclose the fact of, such report.
    (g) Examination and enforcement. Compliance with this section shall 
be examined by the Department of the Treasury, through FinCEN or its 
delegees, under the terms of the Bank Secrecy Act. Reports filed under 
this section shall be made available to an SRO registered with the 
Securities and Exchange Commission examining a broker-dealer for 
compliance with the requirements of this section. Failure to satisfy 
the requirements of this section may constitute a violation of the 
reporting rules of the Bank Secrecy Act and of this part.
    (h) Effective date. This section applies to transactions occurring 
after December 30, 2002.

    Dated: June 25, 2002.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 02-16416 Filed 6-28-02; 8:45 am]
BILLING CODE 4810-02-P