[Federal Register Volume 67, Number 178 (Friday, September 13, 2002)]
[Notices]
[Pages 58095-58097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-23355]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46468; File No. SR-PCX-2002-44]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 by the 
Pacific Exchange, Inc. Regarding Anti-Money Laundering Compliance 
Programs

September 6, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 29, 2002, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the Exchange. On August 29, 2002, the PCX 
amended the proposed rule change.\3\ The Exchange filed the proposal 
pursuant to section 19(b)(3)(A) of the Act,\4\ and Rule 19b-4(f)(6) \5\ 
thereunder, which renders the proposal effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See undated letter from Mai S. Shiver, Senior Attorney, 
Regulatory Policy, PCX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission (``Amendment No. 1''). In 
Amendment No. 1, the PCX requested that the Commission consider the 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act and 
Rule 19b-4(f)(6) thereunder. 15 U.S.C. 78s(b)(3)(A), 17 CFR 240.19b-
4(f)(6). The Commission considers the original filing to have 
satisfied the 5-day pre-filing notice requirement. The PCX asked the 
Commission to waive the 30-day operative delay. The Commission 
corrected a typographical error in the proposed rule language 
without requiring the PCX to file an amendment.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX proposes to adopt PCX Rule 4.25, ``Anti-Money Laundering 
Compliance Program,'' in order to require each options Member or Member 
Organization to develop and implement an anti-money laundering 
compliance program consistent with applicable provisions of the Bank 
Secrecy Act (``BSA'') and the Regulations thereunder. In addition, the 
PCX, through its wholly owned subsidiary, PCX Equities, Inc. (``PCXE'' 
or ``Corporation'') proposes to adopt PCXE Rule 6.17, ``Anti-Money

[[Page 58096]]

Laundering Compliance Program,'' in order to require each Equity 
Trading Permit (``ETP'') Holder to develop and implement an anti-money 
laundering compliance program consistent with applicable provisions of 
the BSA and the Regulations thereunder. The text of the proposed rule 
change is below. Proposed new language is in italics.

Pacific Exchange, Inc.

Rules of the Board of Governors

    Rule 4.26 Anti-Money Laundering Compliance Program. Each Member and 
Member Organization for which the Exchange is the Designated Examining 
Authority, must develop and implement a written anti-money laundering 
program reasonably designed to achieve and monitor the Member or Member 
Organization's compliance with the requirements of the Bank Secrecy Act 
(31 U.S.C. 5311, et seq.), and the implementing regulations promulgated 
thereunder by the Department of the Treasury. Each Member or Member 
Organization's anti-money laundering program must be approved in 
writing by a representative of its senior management staff. The anti-
money laundering programs required by this Rule must include, at a 
minimum, a requirement to:
    (a) Establish and implement policies, procedures and controls that 
can be reasonably expected to detect and cause the reporting of 
transactions required under 31 U.S.C. 5318(g) and implementing 
regulations thereunder;
    (b) Establish and implement policies, procedures and internal 
controls reasonably designed to achieve compliance with the Bank 
Secrecy Act and the implementing regulations thereunder;
    (c) Provide for independent testing for compliance to be conducted 
by Member or Member Organization personnel or a qualified outside 
party;
    (d) Designate an individual or individuals responsible for 
implementing and monitoring the day-to-day operations and controls of 
the program; and
    (e) Provide ongoing training for appropriate personnel.
* * * * *

PCX Equities, Inc.

Rules of the Board of Directors

    Rule 6.17 Anti-Money Laundering Compliance Program. Each ETP 
Holder's anti-money laundering program must be approved in writing by a 
representative of its senior management staff. The anti-money 
laundering programs required by this Rule must include, at minimum, a 
requirement to:
    (a) Establish and implement policies, procedures and controls that 
can be reasonably expected to detect and cause the reporting of 
transactions required under 31 U.S.C. 5318(g) and implementing 
regulations thereunder;
    (b) Establish and implement policies, procedures and internal 
controls reasonably designed to achieve compliance with the Bank 
Secrecy Act and the implementing regulations thereunder;
    (c) Provide for independent testing for compliance to be conducted 
by the ETP Holder personnel or a qualified outside party;
    (d) Designate an individual or individuals responsible for 
implementing and monitoring the day-to-day operations and controls of 
the program; and
    (e) Provide ongoing training for appropriate personnel.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the PCX included statements 
concerning the purpose of and basis for its proposal and discussed any 
comments it received regarding the proposal. The text of these 
statements may be examined at the places specified in Item IV below. 
The PCX has prepared summaries, set forth in Sections A, B and C below, 
of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In 2001, President Bush signed into law the USA PATRIOT Act of 2001 
(the ``PATRIOT Act'') \6\, which amends among other laws the Bank 
Secrecy Act as set forth in Title 31 of the United States Code (the 
``Code''). The PATRIOT Act expands the powers of the government to 
fight the war on terrorism and requires that financial institutions, 
including broker-dealers, implement policies and procedures to that 
end.
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    \6\ USA PATRIOT Act stands for ``Uniting and Strengthening 
America by Providing Appropriate Tools Required to Intercept and 
Obstruct Terrorism.''
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    Title III of the PATRIOT Act, separately referred to as the 
International Money Laundering Abatement and Financial Anti-Terrorism 
Act of 2001 (the ``Money Laundering Act''), focuses on the requirement 
that financial institutions establish anti-money laundering, 
monitoring, and supervisory systems.\7\ The Money Laundering Act 
imposes obligations on brokers and dealers through the new provisions 
and amendments to the BSA. Among other things, brokers and dealers must 
implement anti-money laundering compliance programs, prepare and file 
suspicious transaction reports, and follow due diligence procedures. 
Brokers and dealers are required to comply with these new obligations 
in addition to complying with existing BSA reporting and record-keeping 
requirements.\8\ The Money Laundering Act Section 352, which amends 
section 5318(h) of the Code, requires each financial institution to 
establish anti-money laundering programs by April 24, 2002, that 
include at a minimum: (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.
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    \7\ The statutory definition of ``financial institution'' in the 
Money Laundering Act is exceptionally broad and encompasses 26 
separate categories. See 31 U.S.C. 5312(a)(2). Specifically the 
definition includes, inter alia, an insured bank, a commercial bank 
or trust company, a private banker, an agency or branch of a foreign 
bank in the United States, a thrift institution, a broker or dealer 
registered with the Securities and Exchange Commission under the Act 
(15 U.S.C. 78a et seq.), a broker-dealer in securities or 
commodities, an investment banker or investment company, a currency 
exchange, an insurance company, a loan or finance company, and any 
business or agency that engages in any activity that the Secretary 
of the Treasury determines, by regulation, to be an activity that is 
similar to, or a substitute for any activity in which any business 
described in Sec. 5312(a)(2) is authorized to engage.
    \8\ In addition to the direct requirement of the BSA, and the 
regulations thereunder, Rule 17a-8 under the Act (17 CFR 240.17a-8) 
requires broker-dealers to comply with the recordkeeping and 
reporting requirements of the BSA and related regulations, including 
the obligation to file reports and make and preserve records in 
connection with certain transactions generally exceeding $10,000 and 
involving currency or the physical transport of currency into or out 
of the United States.
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    The legislative history of the PATRIOT Act explains that the 
requirement to have an anti-money laundering compliance program is not 
a ``one-size-fits-all'' requirement. The general nature of the 
requirements reflect Congress' intent that each financial institution 
should have the flexibility to tailor the anti-money laundering 
programs to fit its business, taking into account factors such as size, 
location, activities of the firm's business and the risks or 
vulnerabilities to money laundering in the firm. This flexibility is 
designed to ensure that all entities

[[Page 58097]]

covered by the statute, from very large financial institutions to the 
small firms, have in place policies and procedures to monitor for anti-
money laundering compliance.\9\
    The Exchange anticipates providing guidance in the form of a 
memorandum to assist Members, Member Organizations and ETP Holders in 
developing an anti-money laundering program that fits their business 
models and needs.
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    \9\ See USA PATRIOT Act of 2001: Consideration of H.R. 3162 
Before the Senate (October 25, 2001) (statement of Sen. Sarbanes); 
Financial Anti-Terrorism Act of 2001: Consideration Under Suspension 
of Rules of H.R. 3004 Before the House of Representatives (October 
17, 2001) (statement of Rep. Kelley) (provisions of the Financial 
Anti-Terrorism Act of 2001 were incorporated as Title III in the USA 
PATRIOT Act).
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2. Statutory Basis
    The Exchange believes the proposal is consistent with the 
requirements of section 6(b) of the Act,\10\ in general, and furthers 
the objectives of section 6(b)(5),\11\ in particular, in that it is 
designed to promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
national market system and to protect investors and the public interest 
by establishing minimum requirements for anti-money laundering 
compliance programs for Exchange Members. The programs are designed to 
help identify and prevent money laundering that can affect the 
integrity of the U.S. capital markets.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \12\ and 
Rule 19b-4(f)(6) thereunder.\13\ At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission believes waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. The Commission notes that the proposed rules are consistent 
with anti-money laundering compliance program rules adopted by other 
self-regulatory organizations.\14\ Acceleration of the operative date 
will require Exchange Members to establish, implement, and improve 
anti-money laundering compliance programs without delay. For these 
reasons, the Commission designates the proposal to be effective and 
operative upon filing with the Commission.\15\
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    \14\ Securities Exchange Act Release Nos. 45798 (April 22, 
2002), 67 FR 20854 (April 26, 2002) (SR-NASD-2002-24 and SR-NYSE-
2002-10); and 46041 (June 6, 2002), 67 FR 40366 (SR-Phlx-2002-29).
    \15\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of 
the submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the PCX. All 
submissions should refer to file number SR-PCX-2002-44 and should be 
submitted by October 4, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-23355 Filed 9-12-02; 8:45 am]
BILLING CODE 8010-01-P