[Federal Register Volume 67, Number 141 (Tuesday, July 23, 2002)]
[Proposed Rules]
[Pages 48306-48318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18192]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-46192, File No. S7-25-02]

DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA32


Customer Identification Programs For Broker-Dealers

AGENCIES: Financial Crimes Enforcement Network, Treasury; Securities 
and Exchange Commission.

ACTION: Joint notice of proposed rulemaking.

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SUMMARY: The Department of the Treasury, through the Financial Crimes 
Enforcement Network (FinCEN), and the Securities and Exchange 
Commission are jointly issuing a proposed regulation to implement 
section 326 of the Uniting and Strengthening America by Providing 
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA 
PATRIOT) Act of 2001 (the Act). Section 326 requires the Secretary of 
the Treasury to jointly prescribe with the Securities and Exchange 
Commission a regulation that, at a minimum, requires broker-dealers to 
implement reasonable procedures to verify the identity of any person 
seeking to open an account, to the extent reasonable and practicable; 
maintain records of the information used to verify the person's 
identity; and determine whether the person appears on any lists of 
known or suspected terrorists or terrorist organizations provided to 
the broker-dealer by any government agency.

DATES: Written comments on the proposed rule may be submitted to the 
Treasury Department and the Securities and Exchange Commission on or 
before September 6, 2002.

ADDRESSES: Because paper mail in the Washington area may be subject to 
delay, commenters are encouraged to e-mail comments. Comments should be 
sent by one method only.
    Treasury: Comments may be mailed to FinCEN, Section 326 Broker-
Dealer Rule Comments, P.O. Box 39, Vienna, VA 22183, or sent to 
Internet address [email protected] with the caption 
``Attention: Section 326 Broker-Dealer Rule Comments'' in the body of 
the text. Comments may be inspected at FinCEN between 10 a.m. and 4 
p.m. in the FinCEN Reading Room in Washington, DC. Persons wishing to 
inspect the comments submitted must request an appointment by 
telephoning (202) 354-6400 (not a toll-free number).
    Securities and Exchange Commission: Comments also should be 
submitted in triplicate to Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Comments 
also may be submitted electronically at the following e-mail address: 
[email protected]. Comment letters should refer to File No. S7-25-
02; this file number should be included on the subject line if e-mail 
is used. All comments received will be available for public inspection 
and copying at the Commission's Public Reference Room, 450 Fifth 
Street, NW, Washington, DC 20549-0102. Electronically submitted comment 
letters will be posted on the Commission's Internet web site (http//
www.sec.gov). Personal identifying information, such as names or e-mail 
addresses, will not be edited from electronic submissions. Submit only 
information you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Treasury: Office of the Chief Counsel 
(FinCEN), 703/905-3590; Office of the Assistant General Counsel for 
Enforcement (Treasury), 202/622-1927; or the Office of the Assistant 
General Counsel for Banking & Finance (Treasury), 202/622-0480.
    Securities and Exchange Commission: Division of Market Regulation, 
202/942-0177 or [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

A. Section 326 of the USA PATRIOT Act

    On October 26, 2001, President Bush signed into law the USA PATRIOT 
Act.\1\ Title III of the Act, captioned ``International Money 
Laundering Abatement and Anti-terrorist Financing Act of 2001,'' adds 
several new provisions to the Bank Secrecy Act (BSA). See 31 U.S.C. 
5311 et seq. These provisions are intended to facilitate the 
prevention, detection, and prosecution of international money 
laundering and the financing of terrorism.
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    \1\ Pub. L. 107-56.
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    Section 326 of the Act adds a new subsection (l) to 31 U.S.C. 5318 
that requires the Secretary of the Treasury (Secretary) to prescribe 
regulations setting forth minimum standards for financial institutions 
and their customers regarding the identity of the customer that shall 
apply in connection with the opening of an account at the financial 
institution.
    Section 326 applies to all ``financial institutions.'' This term is 
defined very broadly in the BSA to encompass a variety of entities 
including banks, agencies and branches of foreign banks in the United 
States, investment companies, thrifts, credit unions, brokers and 
dealers in securities or commodities, insurance companies, travel 
agents, pawnbrokers, dealers in precious metals, check-cashers, 
casinos, and telegraph companies, among many others. See 31 U.S.C. 
5312(a)(2).
    For any financial institution engaged in financial activities 
described in section 4(k) of the Bank Holding Company Act of 1956 
(section 4(k) institutions), the Secretary is required to prescribe the 
regulations issued under section 326 jointly with each Federal 
functional regulator appropriate for such financial institution. The 
Federal functional regulators include the Securities and Exchange 
Commission (Commission), the Commodity Futures Trading Commission 
(CFTC), and the banking agencies (banking agencies), namely, the Office 
of the Comptroller of the Currency, the Board of Governors of the 
Federal Reserve System, the Federal Deposit Insurance Corporation, the 
Office of Thrift Supervision, and the National Credit Union 
Administration. Final regulations implementing section 326 must be 
effective before October 25, 2002.
    Section 326 provides that the regulations, at a minimum, must 
require financial institutions to implement reasonable procedures for 
(1) verifying the identity of any person seeking to open an account, to 
the extent reasonable and practicable; (2) maintaining records of the 
information used to verify the person's identity, including name, 
address, and other identifying information; and (3) determining whether 
the person appears on any lists of known or suspected terrorists or 
terrorist organizations provided to the financial institution by any 
government agency.
    In prescribing these regulations, the Secretary is directed to take 
into consideration the various types of accounts maintained by various 
types of financial institutions, the various methods of opening 
accounts, and the various types of identifying information available.

[[Page 48307]]

    The following proposal is being issued jointly by Treasury and the 
Commission. It applies only to persons registered, or required to be 
registered, with the Commission as brokers or dealers under the 
Securities Exchange Act of 1934 (Exchange Act), except persons who 
register pursuant to paragraph (b)(11) of section 15 of the Exchange 
Act (15 U.S.C. 78o(b)(11)) solely because they effect transactions in 
security futures products. This class of brokers and dealers will be 
subject to regulations issued by Treasury and the CFTC separately. 
Regulations governing the applicability of section 326 to other 
financial institutions, such as those regulated by the banking 
agencies, will be issued separately as well.
    Treasury, the Commission, the CFTC and the banking agencies 
consulted extensively in the development of all rules implementing 
section 326 of the Act. All of the participating agencies intend the 
effect of the rules to be uniform throughout the financial services 
industry.
    The Secretary has determined that the records required to be kept 
by section 326 of the Act have a high degree of usefulness in criminal, 
tax, or regulatory investigations or proceedings, or in the conduct of 
intelligence or counterintelligence activities, to protect against 
international terrorism.
    In addition, Treasury under its own authority is proposing 
conforming amendments to 31 CFR 103.35, which currently imposes 
requirements concerning the identification of bank customers.

B. Codification of the Joint Proposed Rule

    The substantive requirements of the joint proposed rule will be 
codified with other BSA regulations as part of Treasury's regulations 
in 31 CFR part 103. To minimize potential confusion by affected 
entities regarding the scope of the joint proposed rule, the Commission 
is also proposing to add a provision in its own regulations in 17 CFR 
part 240 that will cross-reference the regulations in 31 CFR part 103. 
Although no specific text is being proposed at this time, the cross-
reference will be included in a final rule published by the Commission 
concurrently with the joint final rule issued by Treasury and the 
Commission implementing section 326 of the Act.

II. Section-by-Section Analysis

A. Section 103.122(a) Definitions

    Section 103.122(a)(1) Account. The proposed rule's definition of 
``account'' is intended to include all types of securities accounts 
maintained by brokers or dealers. These include accounts to purchase, 
sell, lend or otherwise hold securities or other assets, cash accounts, 
margin accounts, prime brokerage accounts that consolidate trading done 
at a number of firms, and accounts for repurchase and stock loan 
transactions.
    Section 103.122(a)(2) Broker-dealer. The proposed rule defines 
``broker-dealer'' to include any person registered, or required to be 
registered, with the Commission as a broker or dealer under the 
Exchange Act, except persons who register, or are required to be 
registered, solely because they effect transactions in security futures 
products. These latter brokers or dealers, which register with the 
Commission pursuant to section 15(b)(11) of the Exchange Act, will be 
subject to a separate regulation issued jointly by Treasury and the 
CFTC implementing section 326.
    Section 103.122(a)(3) Commission. The proposed rule defines 
``Commission'' to mean the United States Securities and Exchange 
Commission.
    Section 103.122(a)(4) Customer. The proposed rule defines 
``customer'' as any person who opens a new account at a broker-dealer 
or is granted trading authority with respect to an account at a broker-
dealer. Under this definition, a person who has an account at a broker-
dealer prior to the effective date of the regulation would not be a 
``customer.'' However, such a person becomes a ``customer'' if the 
person opens a different account. Moreover, a person becomes a 
``customer'' each time the person opens a different type of account at 
a broker-dealer. Thus, if a person opens a cash account and 
subsequently opens a margin account, the person would be a ``customer'' 
for verification purposes on both occasions.
    Similarly, a person with trading authority prior to the effective 
date of the regulation is not a ``customer.'' However, any person being 
granted trading authority after the effective date is a customer. This 
is true even if the person is granted trading authority with respect to 
an account that existed prior to the effective date or the person had 
been granted trading authority for another account prior to the 
effective date.
    The requirements of section 326 apply to ``customers'' (i.e., 
persons opening new accounts or being granted trading authority), but 
do not apply to persons seeking information about an account such as a 
schedule of transaction fees, if an account is not opened. In addition, 
transfers of accounts from one broker-dealer to another that are not 
initiated by the customer, for example as a result of a merger, 
acquisition, or purchase of assets or assumption of liabilities, fall 
outside of the scope of section 326, and are not covered by the 
proposed regulation.\2\
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    \2\ However, there may be situations involving the transfer of 
accounts where it would be appropriate for a broker-dealer to verify 
the identity of customers associated with the accounts it is 
acquiring. Therefore, Treasury and the Commission expect procedures 
for transfers of accounts to be part of a broker-dealer's overall 
anti-money laundering program required under section 352 of the 
Patriot Act. See Footnote 5 infra for a discussion of the 
requirements of section 352.
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    Section 103.122(a)(5) Person. The proposed rule defines ``person'' 
as having the same meaning as that term is defined in section 
103.11(z). Thus, the term includes natural persons, corporations, 
partnerships, trusts or estates, joint stock companies, associations, 
syndicates, joint ventures, any unincorporated organizations or groups, 
Indian Tribes, and all entities cognizable as legal entities.
    Section 103.122(a)(6) U.S. person. The proposed rule defines ``U.S. 
person'' because U.S. citizens and persons incorporated under U.S. laws 
will be required to provide U.S. tax identification numbers whereas 
other persons, who may not have a U.S. tax identification number, will 
be required to provide other similar numbers. Thus, the rule defines 
``U.S. person'' to mean a U.S. citizen or, for persons other than 
natural persons, an entity established or organized under the laws of a 
State or the United States.\3\
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    \3\ The terms ``State'' and ``United States'' are defined in 
section 103.11.
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    Section 103.122(a)(7) Non-U.S. person. The proposed rule defines a 
``Non-U.S. person'' as a person that is not a ``U.S. person'' as that 
term is defined in the rule.
    Section 103.122(a)(8) Taxpayer identification number. The proposed 
rule defines ``taxpayer identification number'' to have the same 
meaning as determined under the provisions of section 6109 of the 
Internal Revenue Code and the regulations of the Internal Revenue 
Service thereunder.

B. Section 103.122(b) Customer Identification Program

    Section 326 of the Act requires the Secretary and the Commission to 
prescribe regulations requiring broker-dealers to implement and comply 
with ``reasonable procedures'' for: verifying the identity of customers 
``to the extent reasonable and practicable;'' maintaining records 
associated with such verification; and consulting lists of known 
terrorists.

[[Page 48308]]

    Paragraph (b) of the proposed rule sets forth the requirement that 
a broker-dealer must develop and operate a customer identification 
program (``CIP'') and sets forth relevant factors for the design of CIP 
procedures. The degree to which a CIP is effective will be a function 
of a broker-dealer's assessment of these factors and the nature of its 
response to them (as manifested in the CIP's procedures and 
guidelines). In addition, as section 326 and the proposed rule provide, 
the reasonableness of the CIP also will be a function of what is 
practicable for the broker-dealer.
    In developing and updating CIPs, broker-dealers should consider the 
type of identifying information available for customers and the methods 
available to verify that information. While certain minimum identifying 
information is required in paragraph (c) of this proposed rule and 
certain suitable verification methods are described in paragraph (d), 
broker-dealers should consider on an ongoing basis whether other 
information or methods are appropriate, particularly as they become 
available in the future.
    Broker-dealers must also base their CIPs on the risks associated 
with their business operations. Some relevant risk factors to be 
considered are set forth in paragraph (b) and discussed below in 
general terms.\4\
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    \4\ This discussion of the risk factors is included in the 
release because it may be helpful in providing some meaning and 
context with respect to the factors. However, it is not meant to 
provide comprehensive definitions of these risk factors or an 
exhaustive description of the considerations involved in assessing 
them. Instead, it should serve as a starting point for defining and 
assessing them.
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    The first risk factor to consider is the broker-dealer's size. For 
example, a large firm that opens a substantial number of accounts on 
any given day will have different risks than one that opens a new 
account no more than once or twice a month. The same is true with 
respect to a firm that has many branches as compared to a firm with one 
office.
    The second risk factor is the location of the broker-dealer. Firms 
should assess whether they are located in areas where money laundering 
activities have been known to exist or that otherwise raise the risk 
that attempts will be made to open accounts for money laundering 
purposes.
    The third risk factor is the method by which customers open 
accounts at the broker-dealer. Accounts opened exclusively on-line 
present different, and perhaps greater, risks than those opened in 
person on the firm's premises.
    The fourth and fifth risk factors are the types of accounts and 
transactions offered by the broker-dealer. Broker-dealers should assess 
whether there are different risks (and degrees of risk) associated with 
the various types of accounts they provide to customers (e.g., cash, 
margin, prime-brokerage) and transactions they execute in those 
accounts (e.g., short sales, over-the-counter derivatives, repurchase 
and reverse repurchase agreements, block trades).
    The sixth risk factor is the customer base. Broker-dealers should 
assess the risks associated with different types of customers. For 
example, a firm should examine whether it is opening accounts for 
customers located in countries the Secretary determines to be of 
``primary money laundering concern'' pursuant to section 311 of the 
Act. Verification procedures should account for the concerns raised by 
such customers. In addition, certain legal entities may pose greater 
risks (e.g., a closely held corporation as opposed to one that is 
publicly traded).
    The seventh risk factor requires an assessment of whether the 
broker-dealer can rely on another broker-dealer, with which it shares 
an account relationship, to undertake any of the steps required by this 
proposed rule with respect to the shared account. A shared account 
means an account subject to a carrying or clearing agreement governed 
by New York Stock Exchange (NYSE) Rule 382 or National Association of 
Securities Dealers, Inc. (NASD) Rule 3230 (i.e., a customer account 
introduced by a correspondent broker-dealer to a clearing and carrying 
broker-dealer). Rules 382 and 3230 allow correspondents and clearing 
firms to set forth in written agreements a division of responsibilities 
with respect to the accounts they share.
    We anticipate broker-dealers sharing accounts may realize 
efficiencies by dividing up the requirements in this proposed rule 
pursuant to their clearing agreements. For example, the correspondent 
may undertake to obtain the identifying information from customers as 
required in paragraph (c), and the clearing firm may undertake the 
verification procedures as required in paragraph (d). Nonetheless, both 
firms would still be responsible for ensuring that each requirement in 
the rule is met with respect to each customer. Accordingly, a broker-
dealer must continually assess whether the other firm can be relied on 
to perform its responsibilities. This would include communicating and 
coordinating with the other firm on an on-going basis. Moreover, a 
broker-dealer is expected to cease such reliance if it is no longer 
reasonable.
    Paragraph (b) also requires that the identity verification 
procedures must enable the broker-dealer to form a reasonable belief 
that it knows the true identity of the customer. This provision makes 
clear that, while there is flexibility in establishing these 
procedures, the broker-dealer is responsible for exercising reasonable 
efforts to ascertain the identity of each customer.
    Finally, paragraph (b) requires that broker-dealers make their CIPs 
part of their overall anti-money laundering programs required under 
section 352 of the Act (31 U.S.C. 5318(h)).\5\ This requirement is 
intended to make it clear that the CIP is not a separate program, but 
rather should be integrated into a broker-dealer's overall anti-money 
laundering procedures and policies. However, this should not be read to 
create any negative inference about a broker-dealer's need to establish 
and maintain an overall money laundering program that is designed to 
ensure compliance with all other applicable regulations promulgated 
under the Act.
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    \5\ Section 352 requires brokers and dealers to establish anti-
money laundering programs that, at a minimum, include (1) the 
development of internal policies, procedures, and controls; (2) the 
designation of a compliance officer; (3) an ongoing employee 
training program; and (4) an independent audit function to test 
programs. On April 22, 2002, the Commission approved rule changes 
submitted by the NASD and the NYSE. Exchange Act Release No. 45798 
(April 22, 2002), 67 FR 20854 (April 26, 2002). These rules (NASD 
Rule 3011 and NYSE Rule 445) set forth minimum requirements for 
these programs.
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C. Section 103.122(c) Required Information

    The first step in verifying identity is obtaining identifying 
information from customers. Paragraph (c) of the proposed rule provides 
that a broker-dealer's CIP must require customers to provide, at a 
minimum, certain identifying information before an account is opened 
for the customer or the customer is granted trading authority over an 
account. Specifically, the broker-dealer must obtain each customer's: 
(1) Name; (2) date of birth, if applicable; (3) addresses; \6\ and (4) 
documentary number.\7\
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    \6\ With respect to the address requirement, each customer must 
provide a mailing address, and, if different, the address of the 
customer's residence (if a natural person) or principal place of 
business (if not a natural person).
    \7\ Each customer that is a U.S. person must provide a U.S. 
taxpayer identification number (e.g., social security number or 
employer identification number). Customers that are Non-U.S. persons 
must provide either a U.S. taxpayer identification number, an alien 
identification card number, or the number and country of issuance of 
any other government-issued document evidencing nationality or 
residence and bearing a photograph or similar safeguard. The term 
``similar safeguard'' is included to permit the use of any biometric 
identifiers that may be used in addition to, or instead of, 
photographs.

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[[Page 48309]]

    The rule requires only that the minimum identifying information be 
obtained from each customer. Broker-dealers, in assessing the risk 
factors in paragraph (b), should determine whether other identifying 
information is necessary to form a reasonable belief as to the true 
identity of each customer. There may be certain types of customers from 
whom it is reasonable to obtain other identifying information in 
addition to the minimum required information. There also may be 
circumstances that make it appropriate to obtain additional 
information. If a broker-dealer, in examining the nature of its 
business and operations, determines that additional information should 
be obtained in certain cases, it should set forth guidelines in its CIP 
indicating the types of additional information and the circumstances 
when it shall be obtained.
    Treasury and the Commission recognize that a new business may need 
to open a brokerage account before it has received an employer 
identification number (EIN) from the Internal Revenue Service. For this 
reason, the proposed rule contains a limited exception to the 
requirement that a taxpayer identification number must be provided 
prior to the opening of an account or the granting of trading 
authority. Accordingly, a CIP may permit an account to be opened or 
trading authority to be granted for a person, other than an individual 
(such as a corporation, partnership or trust), that has applied for, 
but has not received, an EIN. However, in such a case, the CIP must 
require that the broker-dealer obtain a copy of the application for the 
EIN prior to the time the account is opened or trading authority 
granted. Currently, the IRS indicates that the issuance of an EIN can 
take up to five weeks. This length of time, coupled with when the 
person applied for the EIN, should be considered by the broker-dealer 
in determining the reasonable period of time within which the person 
should provide its EIN to the broker-dealer.

D. Section 103.122(d) Required Verification Procedures

    After obtaining identifying information from a customer, the 
broker-dealer must take steps to verify the accuracy of that 
information in order to reach a point where it can form a reasonable 
belief that it knows the true identity of the customer. Accordingly, 
paragraph (d) of the proposed rule requires a broker-dealer's CIP to 
have procedures for verifying the accuracy of the identifying 
information provided by the customer. The extent of the verification 
for each customer will depend on the steps necessary for a broker-
dealer to reach a reasonable belief that it knows the true identity of 
the customer.
    Paragraph (d) requires that the verification procedures must be 
undertaken within a reasonable time before or after a customer's 
account is opened or a customer is granted authority to effect 
transactions with respect to an account. This flexibility must be 
exercised in a reasonable manner, given that verifications too far in 
advance may become stale and verifications too long after the fact may 
provide opportunities to launder money while verification is pending. 
The amount of time it will take a broker-dealer to verify the identity 
of a customer may depend on the type of account opened, whether the 
customer opens the account in person, and on the type of identifying 
information available. In addition, although an account is opened, a 
broker-dealer may choose to place limits on the account, such as 
restricting the number of transactions or the dollar value of 
transactions, until a customer's identity is verified. Therefore, the 
proposed rule provides broker-dealers with the flexibility to use a 
risk-based approach to determine when the identity of a customer must 
be verified relative to the opening of an account or the granting of 
trading authority. \8\
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    \8\ We note that it is possible a broker-dealer could violate 
other laws by permitting a customer to transact business prior to 
verifying the customer's identity. See, e.g., 31 CFR part 500, 
prohibiting transactions involving designated foreign countries or 
their nationals.
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    A person becomes a customer each time the person opens a new 
account at a broker-dealer or is granted trading authority with respect 
to an account. Therefore, upon the opening of each account or the 
granting of new authority, the verification requirements of this rule 
would apply. However, if a customer whose identification has been 
verified previously opens a new account or is granted new authority, 
the broker-dealer would not need to verify the customer's identity a 
second time, provided the broker-dealer (1) previously verified the 
customer's identity in accordance with procedures consistent with the 
proposed rule, and (2) continues to have a reasonable belief that it 
knows the true identity of the customer.
    The rule provides for two methods of verifying identifying 
information: verification through documents and verification through 
non-documentary means. For example, using documents would include 
obtaining a driver's license or passport from a natural person or 
articles of incorporation from a company. Non-documentary methods would 
include cross-checking the information provided by a customer against 
that supplied by a credit bureau.
    The proposed rule requires that a broker-dealer's CIP address both 
methods of verification. Depending on the type of customer and the 
method of opening an account, it may be more appropriate to use either 
documentary or non-documentary methods. In some cases, it may be 
appropriate to use both methods. The CIP should set forth guidelines 
describing when documents, non-documentary methods, or a combination of 
both will be used. These guidelines should be based on the broker-
dealer's assessment of the factors described in paragraph (b) of the 
proposed rule.
    The risk a broker-dealer will not know a customer's true identity 
will be heightened for certain types of accounts, such as accounts 
opened in the name of a corporation, partnership, or trust that is 
created or conducts substantial business in a jurisdiction the 
Secretary determines is a primary money laundering concern or an 
international body, such as the Financial Action Task Force on Money 
Laundering, designates as non-cooperative. Obtaining sufficient 
information to verify a given customer's true identity can reduce the 
risk a broker-dealer will be used as a conduit for money laundering and 
terrorist financing. A broker-dealer's identity verification procedures 
must be based on its assessments of the factors in paragraph (b). 
Accordingly, when those assessments suggest a heightened risk, the 
broker-dealer should prescribe additional verification measures.
1. Verification Through Documents
    Paragraph (d)(1) provides that the CIP must describe when a broker-
dealer will verify identity through documents and set forth the 
documents that will be used for this purpose. The rule also lists 
certain documents that are suitable for verification. For natural 
persons, these documents may include: unexpired government-issued 
identification evidencing nationality or residence and bearing a 
photograph or similar safeguard. For other persons, suitable documents 
would be ones showing the existence of the entity, such as registered 
articles of incorporation, a government-issued business license, a

[[Page 48310]]

partnership agreement, or a trust instrument.
2. Verification Through Non-Documentary Methods
    Paragraph (d)(2) provides that the CIP must describe non-
documentary verification methods and when such methods will be employed 
in addition to, or instead of, using documents. The rule allows for the 
exclusive use of non-documentary methods because frequently accounts 
are opened by telephone, mail, or over the Internet. However, even if 
the customer presents documents, it may be appropriate to use non-
documentary methods as well. Ultimately, the broker-dealer is 
responsible for employing sufficient verification methods to be able to 
form a reasonable belief that it knows the true identity of the 
customer.
    The proposed rule sets forth certain non-documentary methods that 
would be suitable for verifying identity. These methods include 
contacting a customer after the account is opened; \9\ obtaining a 
financial statement; comparing the identifying information provided by 
the customer against fraud and bad check databases to determine whether 
any of the information is associated with known incidents of fraudulent 
behavior (negative verification); comparing the identifying information 
with information available from a trusted third party source, such as a 
credit report from a consumer reporting agency (positive verification); 
and checking references with other financial institutions. The broker-
dealer also may wish to analyze whether there is logical consistency 
between the identifying information provided, such as the customer's 
name, street address, ZIP code, telephone number (if provided), date of 
birth, and social security number (logical verification).
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    \9\ The purpose of engaging in verification is to check 
identifying information about a customer against an independent 
source. Contacting a customer may be a useful part of the 
verification process when an account is opened on-line or by mail. 
However, a broker-dealer should not rely solely on this method as a 
means of verification.
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    Paragraph (d)(2) also provides that the CIP must require the use of 
non-documentary methods in certain cases; specifically, when a natural 
person is unable to present an unexpired government issued 
identification document that bears a photograph or similar safeguard 
and when the broker-dealer is presented with unfamiliar documents to 
verify the identity of a customer, does not obtain documents to verify 
the identity of a customer, does not meet face-to-face a customer who 
is a natural person, or is otherwise presented with circumstances that 
increase the risk the broker-dealer will be unable to verify the true 
identity of a customer through documents.
    Thus, non-documentary methods should be used when a broker-dealer 
cannot examine original documents. In addition, Treasury and the 
Commission recognize that identification documents, including those 
issued by a government entity, may be obtained illegally and may be 
fraudulent. In light of the recent increase in identity fraud, broker-
dealers are encouraged to use non-documentary methods, even when a 
customer has provided identification documents.

E. Section 103.122(e)  Government Lists

    Section 326 of the Act also requires reasonable procedures for 
determining whether a customer appears on any list of known or 
suspected terrorists or terrorist organizations provided by any 
government agency. The proposed rule implements this requirement and 
clarifies that the requirement applies only with respect to lists 
circulated by the Federal government. In addition, the proposed rule 
states that broker-dealers must follow all Federal directives issued in 
connection with such lists. This provision makes clear that a broker-
dealer must have procedures for responding to circumstances when a 
customer is named on a list.

F. Section 103.122(f)  Customer Notice

    Section 326 provides that financial institutions must give their 
customers notice of their identity verification procedures. Therefore, 
a broker-dealer's CIP must include procedures for providing customers 
with adequate notice that the broker-dealer is requesting information 
to verify their identity. A broker-dealer may satisfy the notice 
requirement by generally notifying its customers about the procedures 
the broker-dealer must comply with to verify their identities. For 
example, the broker-dealer may post a sign in its lobby or provide 
customers with any other form of written or oral notice. If an account 
is to be opened electronically, such as through an Internet website, 
the broker-dealer may provide notice electronically. Notice must be 
given before an account is opened or trading authority is granted.

G. Section 103.122(g)  Lack of Verification

    Paragraph (g) of the proposed rule states that a broker-dealer's 
CIP must include procedures for responding to circumstances in which it 
cannot form a reasonable belief that it knows the true identity of a 
customer. Generally, a broker-dealer should maintain an account for a 
customer only when it can form a reasonable belief that it knows the 
customer's true identity. \10\ Thus, a broker-dealer's CIP should 
specify the actions to be taken when it cannot form a reasonable 
belief. There also should be guidelines for when an account will not be 
opened. In addition, the CIP should address the terms under which a 
customer may conduct transactions while a customer's identity is being 
verified. The CIP should specify at what point, after attempts to 
verify a customer's identity have failed, an account that has been 
opened will be closed. Finally, the procedures should include a process 
for determining whether a Suspicious Activity Report should be filed in 
accordance with applicable laws and regulations.
---------------------------------------------------------------------------

    \10\ There are some exceptions to this basic rule. For example, 
a broker-dealer may maintain an account, at the direction of law 
enforcement, notwithstanding that the broker-dealer does not know 
the true identity of a customer.
---------------------------------------------------------------------------

H. Section 103.122(h)  Recordkeeping

    Section 326 of the Act requires procedures for maintaining records 
of the information used to verify a person's identity, including name, 
address, and other identifying information. Paragraph (h) of the 
proposed rule sets forth recordkeeping procedures that must be included 
in a broker-dealer's CIP. These procedures must provide for the 
maintenance of all information obtained pursuant to the CIP. 
Information that must be maintained includes all identifying 
information provided by a customer pursuant to paragraph (c). Thus, the 
broker-dealer must make a record of each customer's name, date of birth 
(if applicable), addresses, and tax identification number or other 
number. Broker-dealers also must maintain copies of any documents that 
were relied on pursuant to paragraph (d)(1) evidencing the type of 
document and any identification number it may contain. For example, if 
a customer produces a driver's license, the broker-dealer must make a 
copy of the driver's license that clearly indicates it is a driver's 
license and legibly depicts any identification number on the license.
    Broker-dealers also must make and maintain records of the methods 
and results of measures undertaken to verify the identity of a customer 
pursuant to paragraph (d)(2). For example, if a broker-dealer obtains a 
report from a credit bureau concerning a customer, the report must be 
maintained. Broker-dealers also must make and maintain records of the 
resolution of any discrepancy in the identifying information obtained. 
To continue with

[[Page 48311]]

the previous example, if the customer provides a residence address that 
is different than the address shown on the credit report, the broker-
dealer must document how it resolves this discrepancy or, if the 
discrepancy is not resolved, how it forms a reasonable belief 
notwithstanding the discrepancy.
    The broker-dealer must retain all of these records for five years 
after the date the account is closed or the grant of authority to 
effect transactions with respect to an account is revoked. In all other 
respects, the records should be maintained in accordance with the 
requirements of Rule 17a-4. \11\
---------------------------------------------------------------------------

    \11\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    Nothing in this proposed regulation modifies, limits or supersedes 
section 101 of the Electronic Records in Global and National Commerce 
Act, Public Law 106-229, 114 Stat. 464 (15 U.S.C. 7001) (E-Sign Act). 
Thus, a broker-dealer may use electronic records to satisfy the 
requirements of this regulation, as long as the records are maintained 
in accordance with Rule 17a-4(f), which the Commission has interpreted 
as being consistent with the requirements in the E-Sign Act. \12\
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    \12\ See Exchange Act Release No. 44238 (May 1, 2001), 66 FR 
22916 (May 7, 2001).
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    Treasury and the Commission emphasize that the collection and 
retention of information about a customer, as an ancillary part of 
collecting identifying information, do not relieve a broker-dealer from 
its obligations to comply with anti-discrimination laws and 
regulations.

I. Section 103.122(i) Approval of Program

    Paragraph (i) of the proposed rule requires that the broker-
dealer's CIP be approved by the most senior level of the firm (e.g., 
the board of directors, managing partners, board of managers, or other 
governing body performing similar functions) or by persons specifically 
authorized by that body to approve such a program.

J. Section 103.122(j) Exemptions

    Section 326 states that the Secretary and the Federal functional 
regulator jointly issuing a rule under that section may by order or 
regulation exempt any financial institution or type of account from the 
regulation in accordance with such standards and procedures as the 
Secretary may prescribe. The proposed rule provides that the 
Commission, with the concurrence of the Secretary, may exempt any 
broker-dealer that registers with the Commission pursuant to 15 U.S.C. 
78o and 78o-4. However, it excludes from this exemptive authority 
broker-dealers that register pursuant to 15 U.S.C. 78o(b)(11). These 
are firms that register as broker-dealers solely because they deal in 
securities futures products. The exemptive authority with respect to 
these firms will be in the rule issued jointly by Treasury and the 
CFTC. The proposed rule provides that the Secretary, with the 
concurrence of the Commission, may exempt any broker-dealer that 
registers pursuant to 15 U.S.C 78o-5 (i.e., government securities 
dealers).
    In issuing exemptions under the proposed rule, the Secretary and 
the Commission shall consider whether the exemption is consistent with 
the purposes of the BSA, and in the public interest, and may consider 
other necessary and appropriate factors.

III. Conforming Amendments to 31 CFR 103.35

    Current section 103.35(a) sets forth customer identification 
requirements when certain brokerage accounts are opened. Generally, 
sections 103.35(a)(1) and (2) require a broker-dealer, within 30 days 
after an account is opened, to secure and maintain a record of the 
taxpayer identification number of the customer involved. If the broker-
dealer is unable to obtain the taxpayer identification number within 30 
days (or a longer time if the person has applied for a taxpayer 
identification number), it need take no further action under section 
103.35 concerning the account if it maintains a list of the names, 
addresses, and account numbers of the persons for which it was unable 
to secure taxpayer identification numbers, and provides that 
information to the Secretary upon request. In the case of a non-
resident alien, the broker-dealer is required to record the person's 
passport number or a description of some other government document used 
to determine identification.
    Section 103.35(a)(3) currently provides that a broker-dealer need 
not obtain a taxpayer identification number with respect to specified 
categories of persons \13\ opening accounts. The proposed rule does not 
contain any exemptions from the CIP requirements. Treasury believes 
that the requirements of section 103.35(a)(1) and (2) are inconsistent 
with the intent and purpose of section 326 of the Act and incompatible 
with the proposed rule. For these reasons, Treasury, under its own 
authority, is proposing to repeal section 103.35(a).
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    \13\ The exemption applies to (i) agencies and instrumentalities 
of Federal, State, local, or foreign governments; (ii) aliens who 
are ambassadors; ministers; career diplomatic or consular officers; 
naval, military, or other attaches of foreign embassies and 
legations; and members of their immediate families; (iii) aliens who 
are accredited representatives of certain international 
organizations, and their immediate families; (iv) aliens temporarily 
residing in the United States for a period not to exceed 180 days; 
(v) aliens not engaged in a trade or business in the United States 
who are attending a recognized college or university, or any 
training program supervised or conducted by an agency of the Federal 
Government; and (vi) unincorporated subordinate units of a tax 
exempt central organization that are covered by a group exemption 
letter.
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    In addition, Treasury and the Commission are requesting comments on 
whether any of the exemptions in Section 103.35(a)(3) should apply in 
the context of the proposed CIP requirements in light of the intent and 
purpose of section 326 of the Act.

IV. Request for Comments

    Treasury and the Commission invite comment on all aspects of the 
proposed regulation, and specifically seek comment on the following 
issues:
    1. Whether the proposed definition of ``account'' is appropriate 
and whether other examples of accounts should be added to the rule 
text.
    2. How broker-dealers can comply with the requirement to obtain 
both the address of a person's residence, and, if different, the 
person's mailing address in situations involving natural persons who 
lack a permanent address.
    3. Whether non-U.S. persons that are not natural persons will be 
able to provide a broker-dealer with the identifying information 
required in Sec. 103.122(c)(4), or whether other categories of 
identifying information should be added to this section. Commenters on 
this issue should suggest other means of identification that broker-
dealers currently use or should use in this circumstance that would 
allow a broker-dealer to form a reasonable belief that it knows the 
true identity of the entity.
    4. The extent to which the verification procedures required by the 
proposed rule make use of information that broker-dealers currently 
obtain in the account opening process. We note that the legislative 
history of section 326 indicates that Congress intended ``the 
verification procedures prescribed by Treasury [to] make use of 
information currently obtained by most financial institutions in the 
account opening process.'' See H.R. Rep. No. 107-250, pt. 1, at 63 
(2001).
    5. Whether any of the exemptions from the customer identification 
requirements contained in current section 103.35(a)(3) should be 
continued in the proposed rule. In this regard, Treasury and the 
Commission

[[Page 48312]]

request that commenters address the standards set forth in paragraph 
(j) of the proposed rule (as well as any other appropriate factors).

V. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995.\14\ Treasury has submitted the proposed rule to 
the Office of Management and Budget (OMB) for review in accordance with 
44 U.S.C 3507(d). An agency may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless it 
displays a currently valid control number.
---------------------------------------------------------------------------

    \14\ 44 U.S.C. 3502 et seq.
---------------------------------------------------------------------------

A. Collection of Information Under the Proposed Rule

    The proposed rule contains recordkeeping and disclosure 
requirements that are subject to the Paperwork Reduction Act of 1995. 
In summary, the proposed rule requires broker-dealers to implement 
reasonable procedures to (1) maintain records of the information used 
to verify the person's identity and (2) provide notice of the CIPs 
procedures to customers. These recordkeeping and notice requirements 
are required under section 326 of the Act.

B. Proposed Use of the Information

    Section 326 of the Act requires Treasury and the Commission jointly 
to issue a regulation setting forth minimum standards for broker-
dealers and their customers regarding the identity of the customer that 
shall apply in connection with opening of an account at the broker-
dealer. Furthermore, section 326 provides that the regulations, at a 
minimum, must require broker-dealers to implement reasonable procedures 
for (1) verifying the identity of any person seeking to open an 
account, to the extent reasonable and practicable; (2) maintaining 
records of the information used to verify the person's identity, 
including name, address, and other identifying information; and (3) 
determining whether the person appears on any lists of known or 
suspected terrorists or terrorist organizations provided to the 
financial institution by any government agency.
    The purpose of section 326, and the regulations promulgated 
thereunder, is to make it easier to prevent, detect and prosecute money 
laundering and the financing of terrorism. In issuing the proposed 
rule, Treasury and the Commission are seeking to fulfill their 
statutorily mandated responsibilities under section 326 and to achieve 
its important purpose.
    The proposed rule requires each broker-dealer to establish a 
written CIP that must include recordkeeping procedures and procedures 
for providing customers with notice that the broker-dealer is 
requesting information to verify their identity. The proposed rule 
requires a broker-dealer to maintain a record of (1) the identifying 
information provided by the customer, the type of identification 
document(s) reviewed, if any, the identification number of the 
document(s), and a copy of the identification document(s); (2) the 
means and results of any additional measures undertaken to verify the 
identity of the customer; and (3) the resolution of any discrepancy in 
the identifying information obtained.
    The proposed rule also requires each broker-dealer to give 
customers ``adequate notice'' of the identity verification procedures. 
A broker-dealer may satisfy this disclosure requirement by posting a 
sign in the lobby or providing customers with any other form of written 
or oral notice. If the account is opened electronically, the broker-
dealer may provide the notice electronically. Accordingly, a broker-
dealer may choose among a variety of methods of providing adequate 
notice and may select the least burdensome method, given the 
circumstances under which customers seek to open new accounts.

C. Respondents

    The proposed rule would apply to approximately 5,568 broker-
dealers, which is the approximate number of firms that conduct business 
with the general public.

D. Total Annual Reporting and Recordkeeping Burden

1. Providing Notice to Customers
    The requirement to provide notice to customers generally will be a 
one-time burden in terms of drafting and posting or implementing the 
notices. The Commission estimates that broker-dealers will take two 
hours each to draft and post the required notices. There are 
approximately 5,568 broker-dealers that will have to undertake this 
task. Therefore, in complying with this requirement, the Commission 
estimates that the industry as a whole will spend approximately 11,136 
hours.
2. Recordkeeping
    The requirement to make and maintain records related to the CIP 
will be an annual time burden. The total burden to the industry will 
depend on the number of new accounts added each year. The Commission 
estimates that broker-dealers, on average, will spend two minutes per 
account making and maintaining the required records.\15\ Therefore, in 
complying with this requirement, the Commission estimates that the 
industry as a whole will spend approximately 513,333 hours in 2002, 
563,333 hours in 2003, and 620,000 hours in 2004.\16\
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    \15\ The Commission estimates that the number of new accounts in 
the upcoming years will be: 15,400,000 in 2002, 16,900,000 in 2003, 
and 18,600,000 in 2004. The Commission arrived at this estimate by 
considering: (1) the total number of accounts at the 2001 year-end 
(102,700,000) as reported by broker-dealers on Form X-17a-5--
Financial and Operational Combined Uniform Single (FOCUS) Reports 
they file pursuant to section 17 of the Exchange Act and rule 17a-5 
(17 CFR 240.17a-5) thereunder; and (2) the annualized growth rate in 
total accounts for the years 1990 through 2001 (ten percent). The 
Commission also estimates that the number of accounts that are 
closed each year equals five percent of the total number of 
accounts. Accordingly, the Commission estimates that the total 
annualized growth rate for new accounts each year is fifteen 
percent. Therefore, starting with the 2001 total of 102,700,000 and 
using an annualized growth rate of fifteen percent, the Commission 
estimates that 15,400,000 new accounts will be added in 2002, 
16,900,000 in 2003 and 18,600,000 in 2004.
    \16\ The Commission derived these estimates by taking the number 
of new accounts projected for each upcoming year and multiplying the 
number by two minutes and then dividing that number by 60 to convert 
minute totals into hour totals.
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E. Collection of Information Is Mandatory

    These recordkeeping and disclosure (notice) requirements are 
mandatory.

F. Confidentiality

    The collection of information pursuant to the proposed rule would 
be provided by customers and other sources to broker-dealers and 
maintained by broker-dealers. In addition, the information may be used 
by federal regulators, self-regulatory organizations, and authorities 
in the course of examinations, investigations, and judicial 
proceedings. No governmental agency regularly would receive any of the 
information described above.

G. Record Retention Period

    The proposed rule will require that the records with respect to a 
given customer be retained until five years after the date the account 
of a customer is closed or the grant of authority to effect 
transactions with respect to an account is revoked.

[[Page 48313]]

H. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), Treasury and the Commission 
solicit comments to:
    (1) Evaluate whether the proposed collections of information are 
necessary, and whether they would have practical utility,
    (2) Evaluate the accuracy of the estimates of the burden of the 
proposed collection of information,
    (3) Enhance the quality, utility, and clarity of the information to 
be collected, and
    (4) Minimize the burden of the collection of information on those 
required to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Comments concerning the recordkeeping and disclosure requirements 
in the proposed rule should be sent (preferably by fax (202-395-6974)) 
to Desk Officer for the Department of the Treasury, Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Paperwork Reduction Project (1506), Washington, DC 20503 (or by the 
Internet to [email protected]), with a copy to FinCEN by mail or the 
Internet at the addresses previously specified.

VI. Commission's Analysis of the Costs and Benefits Associated With the 
Proposed Rule

    The Commission is considering the costs and benefits associated 
with the proposal and requesting comment on all aspects of this cost-
benefit analysis, including identification and assessment of any other 
costs and benefits not discussed in the analysis. Commenters are 
encouraged to identify, discuss, analyze, and supply relevant data 
concerning the costs and benefits associated with the proposed rule.
    Section 326 of the Act requires Treasury and the Commission to 
prescribe regulations setting forth minimum standards for broker-
dealers regarding the identities of customers that shall apply in 
connection with the opening of an account. The statute also provides 
that the regulations issued by Treasury and the Commission must, at a 
minimum, require financial institutions to implement reasonable 
procedures for: (1) Verification of customers' identities; (2) 
determination of whether a customer appears on a government list; and 
(3) maintenance of records related to customer verification. The 
proposed rule implements this statutory mandate by requiring broker-
dealers to (1) establish a CIP; (2) obtain certain identifying 
information from customers; (3) verify identifying information of 
customers; (4) check customers against lists provided by federal 
agencies, (5) provide notice to customers that information may be 
requested in the process of verifying their identities; and (6) make 
and maintain records. The Commission believes that these requirements 
are reasonable and practicable, as required by the section 326 and, 
therefore, that the costs associated with them are attributable to the 
statute. Moreover, while the proposed rule specifies certain minimum 
requirements, broker-dealers will be able to design their CIPs in a 
manner most appropriate to their business models and customer bases. 
This flexibility should be beneficial to broker-dealers in helping them 
to tailor their CIPs appropriately, while still meeting the statutory 
requirements of section 326.
    Even though the Commission believes the costs associated with the 
proposed rule are attributable to the statute, it nonetheless has 
undertaken an analysis of the costs and benefits of the requirements. 
The Commission seeks comment on all aspects of the proposed rule, 
including whether the proposed rule, by setting forth minimum 
requirements, creates a benefit or, conversely, imposes costs because 
broker-dealers will not be able to choose for themselves the minimum 
procedures they wish to use to meet the requirements of the statute. 
The Commission also seeks comment on whether the costs are attributable 
to the statute.

A. Benefits Associated With the Proposed Rule

    The anti-money laundering provisions in the Act are intended to 
make it easier to prevent, detect and prosecute money laundering and 
the financing of terrorism. The proposed rule is an important part of 
this effort. It fulfills the statutory mandate of section 326 by 
specifying how a broker-dealer is to establish a program that will 
assist it in determining the identities of customers. Verifying 
identities, in turn, will reduce the risk of broker-dealers unwittingly 
aiding criminals, including terrorists, in accessing U.S. financial 
markets to launder money or move funds for illicit purposes. 
Additionally, the implementation of such programs should make it more 
difficult for persons to successfully engage in fraudulent activities 
involving identity theft or the placing of fictitious orders to buy or 
sell securities.

B. Costs Associated with the Proposed Rule

1. Writing Procedures
    Most broker-dealers, as a matter of prudent business practices, 
should already have procedures in place for verifying identities of 
customers. In addition, Exchange Act Rule 17a-3(a)(9) requires broker-
dealers to obtain the name and address of each beneficial owner of a 
cash or margin account.\17\ Similarly, the self-regulatory 
organizations have rules requiring broker-dealers to obtain identifying 
information from customers.\18\ Accordingly, firms should already have 
written procedures for complying with these existing regulations.
---------------------------------------------------------------------------

    \17\ 17 CFR 240.17a-3(a)(9).
    \18\ See, e.g., NYSE Rule 405, NASD Rule 3110.
---------------------------------------------------------------------------

    Nonetheless, the Commission believes that some broker-dealers will 
have to update or establish a CIP. The proposed rule seeks to keep the 
costs low by allowing for great flexibility in establishing a CIP. For 
example, it is to be based on factors specific to each broker-dealer, 
such as size, customer base and location. Thus, the analysis and detail 
necessary for a CIP will depend on the complexity of the broker-dealer 
and its operations. Given the considerable differences among broker-
dealers, it is difficult to quantify a cost per broker-dealer. Highly 
complex firms will have more risk factors to consider, given, for 
example, their size, multiple offices, variety of services and products 
offered, and range of customers. However, most large firms already have 
some procedures in place for verifying customer identities. Smaller and 
less complex firms will not have as many risk factors.
    The Commission estimates that establishing a written CIP could 
result in additional costs for some broker-dealers to the extent they 
do not have verification procedures that meet the minimum requirements 
in the rule. This includes broker-dealers that would need to augment 
their procedures to make them compliant. On average, the Commission 
estimates the additional cost per broker-dealer to establish a 
compliant CIP to be approximately $2,244, resulting in a one time 
overall cost to the industry of approximately $12,494,592.\19\
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    \19\ The Commission estimates that it will take broker-dealers 
on average approximately 20 hours to establish a written CIP. This 
estimate seeks to account for the fact that many firms already have 
customer identification and verification procedures and that 
discrepancies in size and complexity will result in differing time 
burdens. The Commission believes that broker-dealers will have 
senior compliance personnel draft their CIPs and that this will take 
an average of 16 hours. The Commission anticipates that in-house 
counsel will spend on average 4 hours reviewing the CIP. According 
to the Securities Industry Association (``SIA'') Management and 
Professional Earnings 2000 report (``SIA Earnings Report''), Table 
051, the hourly cost of a compliance manager plus 35% overhead is 
$101.25. The hourly cost for an in-house counsel plus 35% overhead 
is $156.00 (SIA Earnings Report, Table 107 (Attorney)). Therefore, 
the Commission estimates that the total cost per broker-dealer to 
establish a CIP would be $2,244 per broker-dealer [(16 x $101.25) + 
(4 x $156.00)]. As of the 2000 year-end, there were approximately 
5,568 broker-dealers that engaged in some form of a public business. 
Therefore, the Commission estimates that the total cost to the 
industry would be $2,244 multiplied by 5,568 or $12,494,592.

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[[Page 48314]]

2. Obtaining Identifying Information
    The Commission believes that broker-dealers already obtain from 
customers most, if not all, of the information required under the 
proposed rule.\20\ Rule 17a-3(a)(9) requires broker-dealers to obtain, 
with respect to each margin and cash account, the name and address of 
each beneficial owner, provided that the broker-dealer need only obtain 
such information from the persons authorized to transact business for 
the account if it is a joint or corporation account.\21\
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    \20\ For example, the Anti-Money Laundering Committee of the SIA 
recommended in its Preliminary Guidance for Deterring Money 
Laundering Activity (February 2002) that broker-dealers obtain 
certain identifying information from customers at the commencement 
of the business relationship, including, for natural persons: name, 
address, date of birth, investment experience and objectives, social 
security number or taxpayer identification number, net worth, annual 
income, occupation, employer's address, and the names of any persons 
authorized to effect transactions in the account. For non-resident 
aliens, the SIA Committee recommended that the broker-dealer obtain, 
in addition to the information above, a passport number or other 
valid government identification number. The SIA Committee also made 
a number of recommendations with respect to customers that are not 
natural persons.
    \21\ 17 CFR 240.17a-3(a)(9).
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    Further, broker-dealers are already required, pursuant to NASD Rule 
3110, to obtain certain identifying information with respect to each 
account.\22\ For example, if the customer is a natural person, the rule 
requires the broker-dealer to obtain the customer's name and 
address.\23\ In addition, the broker-dealer must determine whether the 
customer is of legal age, and, if the customer purchases more than just 
open-end investment company shares or is solicited to purchase such 
shares, the broker-dealer must obtain the customer's tax identification 
or social security number.\24\ If the customer is a corporation, 
partnership, or other legal entity, the broker-dealer must obtain its 
name, residence, and the names of any persons authorized to transact 
business on behalf of the entity.\25\ If the account is a discretionary 
account, the broker-dealer must obtain the signature of each person 
authorized to exercise discretion over the account.\26\ Finally, the 
broker-dealer must maintain all of this information as a record of the 
firm.
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    \22\ Section 15(b)(8) of the Exchange Act (15 U.S.C. 78o(b)(8)) 
requires each broker-dealer to become a member of a securities 
association registered pursuant to section 15A of the Exchange Act 
(15 U.S.C. 78o-3) unless the broker-dealer effects transactions 
solely on a national securities exchange of which it is a member. 
The NASD is the only securities association registered pursuant to 
section 15A. Exchange Act Rule 15b9-1 (17 CFR 240.15b9-1) exempts 
broker-dealers from this requirement to register with the NASD if 
they (1) are an exchange member, (2) carry no customer accounts, and 
(3) derive gross annual income from purchases and sales of 
securities other than on a national securities exchange of not 
greater than $1,000. Generally then, most broker-dealers that carry 
customer accounts are members of the NASD and subject to Rule 3110.
    \23\ NASD Rule 3110(c)(1).
    \24\ NASD Rule 3110(c)(2).
    \25\ NASD Rule 3110(c)(1).
    \26\ NASD Rule 3110(c)(3).
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    In addition, NYSE Rule 405 requires broker-dealers to ``[u]se due 
diligence to learn the essential facts relative to every customer, 
every order, every cash or margin account accepted or carried by such 
organization and every person holding power of attorney over any 
account accepted or carried by such organization.'' \27\
---------------------------------------------------------------------------

    \27\ NYSE Rule 405(1).
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    While broker-dealers are required currently to obtain most of this 
information, the Commission estimates that there will be some new costs 
for broker-dealers because some may not be obtaining all the required 
information. The Commission estimates that the total cost to the 
industry to obtain the minimum identifying information will be 
$5,826,333 in 2002, $6,393,833 in 2003, and $7,037,000 in 2004.\28\ The 
Commission also estimates that some broker-dealers will have to update 
their account opening applications or account opening websites in order 
to insert line items requesting customers to provide the required 
information. The Commission estimates that this will result in a one-
time cost to the industry of $563,760.\29\
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    \28\ The Commission estimates that obtaining the required 
minimum identifying information will take broker-dealers 
approximately one minute per account. This takes into consideration 
the fact that approximately 97% of customer accounts are held at the 
70 largest broker-dealers. These firms likely already obtain the 
required identifying information from their customers. Therefore, 
requiring that each piece of identifying information be obtained 
should not impose a significant additional burden. The average 
hourly cost of the person who would be obtaining this information is 
$22.70 per hour (per the SIA Earnings Report, Table 082 (Retail 
Sales Assistant, Registered) and including 35% in overhead charges). 
Therefore, the costs to the industry would be: (number of new 
accounts per year) x (\1/60\ of an hour) x ($22.70). As indicated 
previously, the Commission estimates that the number of new accounts 
in the upcoming years will be: 15,400,000 in 2002, 16,900,000 in 
2003, and 18,600,000 in 2004.
    \29\ The Commission estimates that it will take each broker-
dealer, on average, one hour to update account opening applications 
or electronic account opening systems. The Commission believes that 
broker-dealers will have a compliance manager implement the 
necessary changes. The hourly cost for a compliance manager is 
$101.25 (SIA Earnings Report, Table 051 (Compliance manager)). 
Accordingly, the total cost to the industry would be: ($101.25) x 
(the number of broker-dealers doing a public business or 5,568) or 
$563,760.
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3. Verifying Identifying Information
    The proposed rule provides broker-dealers with substantial 
flexibility in establishing how they will independently verify the 
information provided by customers. For example, customers that open 
accounts on a broker-dealer's premises can simply provide a driver's 
license or passport, or if the customer is not a natural person, it can 
provide a copy of any documents showing its existence as a legal entity 
(e.g., articles of incorporation, business licenses, partnership 
agreements or trust instruments). There are also a number of options 
for customers that open accounts via the telephone or Internet. In 
these cases, broker-dealers may obtain a financial statement from the 
customer, check the customer's name against a credit bureau or 
database, or check the customer's references with other financial 
institutions.
    The documentary and non-documentary verification methods set forth 
in the rule are not meant to be an exclusive list of the appropriate 
means of verification. Other reasonable methods may be available now or 
in the future. The purpose of making the rule flexible is to allow 
broker-dealers to select verification methods that are, as section 326 
requires, reasonable and practicable. Methods that are appropriate for 
a smaller broker-dealer with a fairly localized customer base may not 
be sufficient for a larger firm with customers from many different 
countries. The proposed rule recognizes this fact and, therefore, 
allows broker-dealers to employ such verification methods as would be 
suitable to a given firm to form a reasonable belief that it knows the 
true identities of its customers.
    The Commission estimates that verifying the identifying information 
could result in costs for broker-dealers because some firms currently 
may not use verification methods. The Commission estimates that the 
total cost to the industry to verify the identifying information will 
be $48,628,333 in

[[Page 48315]]

2002, $53,375,833 in 2003, and $58,745,000 in 2004.\30\
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    \30\ The Commission estimates that the processing costs 
associated with verification methods will be approximately $1.00 per 
account. The Commission further estimates that the average time 
spent verifying an account will be five minutes. The hourly cost of 
the person who would undertake the verification is $25.90 per hour 
(per the SIA Earnings Report, Table 086 (Data Entry Clerk, Senior) 
and including 35% in overhead charges). Therefore, the costs to the 
industry reported above are: (number of new accounts per year) x 
($1.00) + (number of new accounts per year) x (\1/12\ of an hour) x 
($25.90). The Commission estimates that the number of new accounts 
in the upcoming years will be: 15,400,000 in 2002, 16,900,000 in 
2003, and 18,600,000 in 2004.
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4. Determining Whether Customers Appear on a Federal Government List
    The Commission believes that broker-dealers who receive federal 
government lists, chiefly clearing firms, already have procedures for 
checking customers against them. First, there are substantive legal 
requirements associated with the lists circulated by Treasury's Office 
of Foreign Asset Control of the U.S. Treasury (OFAC). The failure of a 
firm to comply with these requirements could result in criminal and 
civil penalties. The Commission believes that, given the events of 
September 11, 2001, most broker-dealers that receive lists from the 
federal government have implemented procedures for checking their 
customers against them.
    The Commission estimates that this requirement could result in some 
additional costs for broker-dealers because some may not already check 
such lists. The Commission estimates that the total cost to the 
industry to check such lists will be $3,323,833 in 2002, $3,647,583 in 
2003, and $4,014,500 in 2004.\31\
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    \31\ The Commission believes that most of the firms that receive 
these lists already check their customers against them. Moreover, as 
indicated previously, 97% of customer accounts are held at the 70 
largest firms. The Commission understands that most of these firms 
have automated processes for complying with many regulatory 
requirements. Accordingly, the Commission estimates that it will 
take broker-dealers on average thirty seconds to check whether a 
person appears on a government list. The hourly cost of the person 
who would check the list is $25.90 per hour (per the SIA Earnings 
Report, Table 086 (Data Entry Clerk, Senior) and including 35% in 
overhead charges). Therefore, the costs to the industry reported 
above are: (number of new accounts per year) x (\1/120\ of an hour) 
x ($25.90). The Commission estimates that the number of new accounts 
in the upcoming years will be: 15,400,000 in 2002, 16,900,000 in 
2003, and 18,600,000 in 2004.
---------------------------------------------------------------------------

    5. Providing Notice to Customers
    A broker-dealer may satisfy the notice requirement by generally 
notifying its customers about the procedures the broker-dealer must 
comply with to verify their identities. For example, the broker-dealer 
may post a sign in its lobby or provide customers with any other form 
of written or oral notice. If an account is opened electronically, such 
as through an Internet website, the broker-dealer may provide notice 
electronically. The Commission estimates the total one-time cost to the 
industry to provide notice to customers to be $1,432,368.\32\
---------------------------------------------------------------------------

    \32\ The Commission estimates that it will take each broker-
dealer, on average, two hours to create and implement the 
appropriate notice. This estimate takes into consideration the fact 
that many small firms will be able to provide adequate notice by 
hanging signs in their premises. Larger firms will be able to 
provide notice by updating account opening documentation or 
electronic account opening systems. The Commission believes that 
broker-dealers will have an attorney draft the appropriate notice, 
and that this will take approximately one hour. The hourly cost for 
an in-house counsel plus 35% overhead is $156.00 (SIA Earnings 
Report, Table 107, (Attorney)). The Commission believes that broker-
dealers will have a compliance manager implement the notice, and 
that implementation will take approximately one hour. The hourly 
cost for a compliance manager is $101.25 (SIA Earnings Report, Table 
051 (Compliance manager)). Accordingly, the total cost to the 
industry would be: ($156.00 + 101.25) x (the number of broker-
dealers doing a public business or 5,568) or $1,432,368.
---------------------------------------------------------------------------

6. Recordkeeping
    The Commission estimates that many of the records required by the 
rule are already made and maintained by broker-dealers. As discussed 
above, Commission and self-regulatory organization rules already 
require broker-dealers to obtain much of the minimum identifying 
information specified in the proposed rule. These regulations also 
require that records be made and kept of this information. The 
Commission estimates that the recordkeeping requirement could result in 
additional costs for some broker-dealers that currently do not maintain 
certain of the records for the prescribed time period. The Commission 
estimates that the total cost to the industry to make and maintain the 
required records in the upcoming years will be $13,295,333 in 2002, 
$14,590,333 in 2003, and $16,058,000 in 2004.\33\
---------------------------------------------------------------------------

    \33\ The Commission estimates that it will take approximately 
two minutes per new account to make and maintain the required 
records. This estimate takes into account the fact that many broker-
dealers already make and maintain many of the required records. In 
addition, for many new accounts, the recordkeeping will be fairly 
simple (e.g., making a photocopy of a driver's license or financial 
statement, or keeping a record of the results of a public database 
search or credit bureau query. The hourly cost of the person who 
would undertake the verification is $25.90 per hour (per the SIA 
Earnings Report, Table 086 (Data Entry Clerk, Senior) and including 
35% in overhead charges). Therefore, the costs to the industry 
reported above are: (number of new accounts per year) x (\1/30\ of 
an hour) x ($25.90). The Commission estimates that the number of new 
accounts in the upcoming years will be: 15,400,000 in 2002, 
16,900,000 in 2003, and 18,600,000 in 2004.
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VII. Regulatory Flexibility Act

    Treasury and the Commission are sensitive to the impact our rules 
may impose on small entities. Congress enacted the Regulatory 
Flexibility Act, 5 U.S.C. 601 et seq., to address concerns related to 
the effects of agency rules on small entities. In this case, Treasury 
and the Commission believe that the proposed rule likely would not have 
a ``significant economic impact on a substantial number of small 
entities.'' 5 U.S.C. 605(b). First, the economic impact on small 
entities should not be significant because most small entities are 
likely to have a relatively small number of accounts, and thus 
compliance should not impose a significant economic impact. Second, as 
discussed in Section VI (the Commission's cost benefit analysis), the 
economic impact on broker-dealers, including small entities, is imposed 
by the statute itself, and not by the proposed rule. Treasury and the 
Commission seek comment on whether the proposed rule would have a 
significant economic impact on a substantial number of small entities 
and whether the costs are imposed by the statute itself, and not the 
proposed rule.
    While Treasury and the Commission believe that the proposed rule 
likely would not have a significant economic impact on a substantial 
number of small entities, Treasury and the Commission do not have 
complete data at this time to make this determination. Therefore, an 
Initial Regulatory Flexibility Analysis has been prepared in accordance 
with 5 U.S.C. 603.

A. Reason for the Proposed Action

    Section 326 of the Act requires Treasury and the Commission jointly 
to issue a regulation setting forth minimum standards for broker-
dealers and their customers regarding the identity of the customer that 
shall apply in connection with the opening of an account at the broker-
dealer. Furthermore, section 326 requires, at a minimum, that broker-
dealers implement reasonable procedures for (1) verifying the identity 
of any person seeking to open an account, to the extent reasonable and 
practicable; (2) maintaining records of the information used to verify 
the person's identity, including name, address, and other identifying 
information; and (3) determining whether the person appears on any 
lists of known or suspected terrorists or terrorist organizations 
provided to the financial institution by any government agency.
    The purpose of section 326, and the regulations promulgated 
thereunder, is

[[Page 48316]]

to make it easier to prevent, detect and prosecute money laundering and 
the financing of terrorism. In issuing the proposed rule, Treasury and 
the Commission are seeking to fulfill their statutorily mandated 
responsibilities under section 326 and to achieve its important 
purpose.

B. Objective

    The objective of the proposed regulation is to make it easier to 
prevent, detect and prosecute money laundering and the financing of 
terrorism. The proposed rule seeks to achieve this goal by specifying 
the information broker-dealers must obtain from or about customers that 
can be used to verify the identity of the customers. This will make it 
more difficult for persons to use false identities to establish 
customer relationships with broker-dealers for the purposes of 
laundering money or moving funds to effectuate illegal activities, such 
as financing terrorism.

C. Legal Basis

    The proposed rule is being promulgated pursuant to section 326 of 
the Act, which mandates that Treasury and the Commission issue a 
regulation setting forth minimum standards for financial institutions 
and their customers regarding the identity of customers that shall 
apply in connection with the opening of accounts at financial 
institutions.

D. Small Entities Subject to the Rule

    The proposed rule would affect broker-dealers that are small 
entities. Rule 0-10 under the Exchange Act \34\ defines a broker-dealer 
to be small if it (1) had total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the date in the prior fiscal year 
as of which its audited financial statements were prepared pursuant to 
Sec. 240.17a-5(d) or, if not required to file such statements, a broker 
or dealer that had total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the last business day of the 
preceding fiscal year (or in the time that it has been in business, if 
shorter); and (2) is not affiliated with any person (other than a 
natural person) that is not a small business or small organization as 
defined in the rule.
---------------------------------------------------------------------------

    \34\ 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    As of December 31, 2000, the Commission estimates there were 
approximately 873 broker-dealers that were ``small'' for purposes of 
Rule 0-10 that would be subject to this rule because they conduct 
business with the general public. The Commission bases its estimate on 
the information provided in broker-dealer FOCUS Reports.

E. Reporting, Recordkeeping and other Compliance Requirements

    The proposed rule would require broker-dealers to (1) establish a 
CIP; (2) obtain certain identifying information from customers; (3) 
verify identifying information of customers; (4) check customers 
against lists provided by federal agencies; (5) provide notice to 
customers that information may be requested in the process of verifying 
their identities; and (6) make and maintain records related to the CIP.

F. Duplicative, Overlapping or Conflicting Federal Rules

    As discussed throughout this preamble, there are other federal 
rules that contain requirements for collecting certain information from 
customers. However, these other requirements do not provide sufficient 
information for broker-dealers to verify the identity of their 
customers. Congress has mandated that Treasury and the Commission issue 
a regulation that requires broker-dealers to undertake such 
verifications.

G. Significant Alternatives

    If an agency does not certify that a rule will not have a 
significant economic impact on a substantial number of small entities, 
the Regulatory Flexibility Act directs Treasury and the Commission to 
consider significant alternatives that would accomplish the stated 
objective, while minimizing any adverse impact on small entities.
    In connection with the proposed amendments, we considered the 
following alternatives: (1) The establishment of differing compliance 
or reporting requirements or timetables that take into account the 
resources of small entities; (2) the clarification, consolidation, or 
simplification of compliance and reporting requirements under the rule 
for small entities; (3) the use of performance rather than design 
standards; and (4) an exemption from coverage of the proposed 
amendments, or any part thereof, for small entities.
    The proposed rule provides for substantial flexibility in how each 
broker-dealer may meet its requirements. This flexibility is designed 
to account for differences between broker-dealers, including size. 
Nonetheless, Treasury and the Commission did consider alternatives such 
as exempting certain small entities from some or all of the 
requirements of the proposed rule. Treasury and the Commission do not 
believe that such an exemption is appropriate, given the flexibility 
built into the rule to account for, among other things, the differing 
sizes and resources of broker-dealers, as well as the importance of the 
statutory goals and mandate of section 326. Money laundering can occur 
in small firms as well as large firms.

H. Solicitation of Comments

    Treasury and the Commission encourage the submission of comments 
with respect to any aspect of this Initial Regulatory Flexibility 
Analysis, including comments regarding the number of small entities 
that may be affected by the proposed rule. Such comments will be 
considered by Treasury and the Commission in determining whether a 
Final Regulatory Flexibility Analysis is required, and will be placed 
in the same public file as comments on the proposed amendment itself. 
Comments should be submitted to Treasury or the Commission at the 
addresses previously indicated.

VIII. Executive Order 12866

    The Department of the Treasury has determined that this rule is not 
a significant regulatory action for purposes of Executive Order 12866. 
As noted above, the proposed rule closely parallels the requirements of 
section 326 of the Act. Accordingly, a regulatory impact analysis is 
not required.

Lists of Subjects in 31 CFR Part 103

    Administrative practice and procedure, Authority delegations 
(Government agencies), Banks, banking, Brokers, Currency, Foreign 
banking, Foreign currencies, Gambling, Investigations, Law enforcement, 
Penalties, Reporting and recordkeeping requirements, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, part 103 of title 31 of 
the Code of Federal Regulations is proposed to be amended as follows:

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

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

    Authority: 12 U.S.C. 1786(q), 1818, 1829b and 1951-1959; 31 
U.S.C. 5311-5332; title III, secs. 312, 313, 314, 319, 326, 352, 
Pub. L. 107-56, 115 Stat. 307.

    2. Section 103.35 is amended as follows:
    a. By removing paragraph (a);
    b. By redesignating paragraph (b) introductory text and paragraphs 
(b)(1) through (b)(4) as introductory text and paragraphs (a) through 
(d), respectively; and

[[Page 48317]]

    c. In newly redesignated introductory text, by removing ``, in 
addition,'' in the first sentence.
    3. Subpart I of part 103 is amended by adding Sec. 103.122 to read 
as follows:


Sec. 103.122  Customer identification programs for broker-dealers.

    (a) Definitions. For the purposes of this section:
    (1) Account means any formal business relationship with a broker-
dealer established to effect financial transactions in securities, 
including, but not limited to, the purchase or sale of securities, 
securities loan and borrowed activity, or the holding of securities or 
other assets for safekeeping or as collateral. For example, a cash 
account, margin account, prime brokerage account that consolidates 
trading done at a number of firms, or an account for repurchase 
transactions would each constitute an account.
    (2) Broker-dealer means any person registered or required to be 
registered as a broker or dealer with the Commission under the 
Securities Exchange Act of 1934 (15 U.S.C 77a et seq.), except persons 
who register pursuant to 15 U.S.C 78o(b)(11).
    (3) Commission means the United States Securities and Exchange 
Commission.
    (4) Customer means:
    (i) Any person who opens a new account with a broker-dealer; and
    (ii) Any person who is granted authority to effect transactions 
with respect to an account with a broker-dealer.
    (5) Person has the same meaning as that term is defined in 
Sec. 103.11(z).
    (6) U.S. person means:
    (i) Any U.S. citizen; and
    (ii) Any corporation, partnership, trust, or person (other than a 
natural person) that is established or organized under the laws of a 
State or the United States.
    (7) Non-U.S. person means a person that is not a U.S. person.
    (8) Taxpayer identification number. The provisions of section 6109 
of the Internal Revenue Code of 1986 (26 U.S.C. 6109) and the 
regulations of the Internal Revenue Service promulgated thereunder 
shall determine what constitutes a taxpayer identification number.
    (b) Customer identification program. A broker-dealer shall 
establish, document, and maintain a written Customer Identification 
Program (``CIP''). A broker-dealer's CIP procedures must enable it to 
form a reasonable belief that it knows the true identity of the 
customer. A broker-dealer's CIP must be a part of its anti-money 
laundering program required under 31 U.S.C. 5318(h). A broker-dealer's 
CIP procedures shall be based on the type of identifying information 
available and on an assessment of relevant risk factors including:
    (1) The broker-dealer's size;
    (2) The broker-dealer's location;
    (3) The broker-dealer's methods for opening accounts;
    (4) The types of accounts the broker-dealer maintains for 
customers;
    (5) The types of transactions the broker-dealer executes for 
customers;
    (6) The broker-dealer's customer base; and
    (7) The broker-dealer's reliance on another broker-dealer with 
which it shares an account relationship.
    (c) Required information--(1) General. Except as permitted by 
paragraph (c)(2) of this section, the CIP shall require the broker-
dealer to obtain specified identifying information about each customer 
before an account is opened or a customer is granted authority to 
effect transactions with respect to an account. The specified 
information must include, at a minimum:
    (i) Name;
    (ii) Date of birth, for a natural person;
    (iii) Addresses:
    (A) Residence and mailing (if different) for a natural person; or
    (B) Principal place of business and mailing (if different) for a 
person other than a natural person; and
    (iv) Documentary record:
    (A) U.S. person. A taxpayer identification number from each 
customer that is a U.S. person; or
    (B) Non-U.S. person. A taxpayer identification number, passport 
number and country of issuance, an alien identification card number, or 
the number and country of issuance of any other government-issued 
document evidencing nationality or residence and bearing a photograph 
or similar safeguard.
    (2) Limited exception. In the case of a person other than a natural 
person that has applied for, but has not received, an employer 
identification number, the CIP may allow the employer identification 
number to be provided within a reasonable period of time after the 
account is established, if the broker-dealer obtains a copy of the 
application for the employer identification number prior to the opening 
of an account or the granting of trading authority.
    (d) Required verification procedures. The CIP shall include 
procedures for verifying the identity of customers, to the extent 
reasonable and practicable, using identifying information obtained. 
Such verification must occur within a reasonable time before or after 
the customer's account is opened or the customer is granted authority 
to effect transactions with respect to an account.
    (1) Verification through documents. The CIP must describe when the 
broker-dealer will verify customers' identities through documents and 
describe the documents that the broker-dealer will use for this 
purpose. Suitable documents for verification may include:
    (i) For natural persons, an unexpired government-issued 
identification evidencing nationality or residence and bearing a 
photograph or similar safeguard; and
    (ii) For persons other than natural persons, documents showing the 
existence of the entity, such as registered articles of incorporation, 
a government-issued business license, a partnership agreement, or a 
trust instrument.
    (2) Verification through non-documentary methods. The CIP must 
describe non-documentary methods the broker-dealer will use to verify 
customers' identities and when these methods will be used in addition 
to, or instead of, relying on documents. Non-documentary verification 
methods may include contacting a customer, obtaining a financial 
statement, independently verifying information through credit bureaus, 
public databases, or other sources, and checking references with other 
financial institutions. Non-documentary methods shall be used when a 
customer who is a natural person is unable to present an unexpired 
government-issued identification document that bears a photograph or 
similar safeguard, or the broker-dealer is presented with unfamiliar 
documents to verify the identity of a customer, the broker-dealer does 
not obtain documents to verify the identity of a customer, does not 
meet face-to-face a customer who is a natural person, or the broker-
dealer is otherwise presented with circumstances that increase the risk 
that the broker-dealer will be unable to verify the true identity of a 
customer through documents.
    (e) Government lists. The CIP shall include procedures for 
determining whether a customer appears on any list of known or 
suspected terrorists or terrorist organizations provided to the broker-
dealer by any federal government agency. Broker-dealers shall follow 
all federal directives issued in connection with such lists.
    (f) Customer notice. The CIP shall include procedures for providing 
customers with adequate notice that the broker-dealer is requesting 
information to verify their identities.

[[Page 48318]]

    (g) Lack of verification. The CIP shall include procedures for 
responding to circumstances in which the broker-dealer cannot form a 
reasonable belief that it knows the true identity of a customer.
    (h) Recordkeeping. The CIP shall include procedures for making and 
retaining a record of all information obtained pursuant to the CIP.
    (1) Required records. At a minimum, the CIP shall require the 
broker-dealer to make the following records:
    (i) All identifying information provided by a customer pursuant to 
paragraph (c) of this section, and copies of any documents that were 
relied on pursuant to paragraph (d)(1) of this section that accurately 
depict the types of documents and any identification numbers they may 
contain;
    (ii) The methods and results of any measures undertaken to verify 
the identity of a customer pursuant to paragraph (d)(2) of this 
section; and
    (iii) The resolution of any discrepancy in the identifying 
information obtained.
    (2) Retention of records. The broker-dealer must retain all records 
made or obtained when verifying the identity of a customer pursuant to 
its CIP until five years after the date the account of the customer is 
closed or the grant of authority to effect transactions with respect to 
an account is revoked. In all other respects, the records shall be 
maintained pursuant to the provisions of 17 CFR 240.17a-4.
    (i) Approval of CIP. The CIP shall be approved by the broker-
dealer's board of directors, managing partners, board of managers or 
other governing body performing similar functions or by a person or 
persons specifically authorized by such bodies to approve the CIP.
    (j) Exemptions. The Commission, with the concurrence of the 
Secretary, may by order or regulation exempt any broker-dealer that 
registers with the Commission pursuant to 15 U.S.C. 78o (except broker-
dealers that register under subsection (b)(11) of that section) or 15 
U.S.C. 78o-4 or type of account from the requirements of this section. 
The Secretary, with the concurrence of the Commission, may exempt any 
broker-dealer that registers with the Commission pursuant to 15 U.S.C. 
78o-5. In issuing such exemptions, the Commission and the Secretary 
shall consider whether the exemption is consistent with the purposes of 
the Bank Secrecy Act, and in the public interest, and may consider 
other necessary and appropriate factors.

    Dated: July 15, 2002.
James F. Sloan,
Director, Financial Crimes Enforcement Network.

    Dated: July 12, 2002.
    By the Securities and Exchange Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-18192 Filed 7-22-02; 8:45 am]
BILLING CODE 8010-01-P; 4830-01-P516