[Federal Register Volume 68, Number 90 (Friday, May 9, 2003)]
[Rules and Regulations]
[Pages 25113-25131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11017]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47752, 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 final rule.

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

SUMMARY: The Department of the Treasury, through the Financial Crimes 
Enforcement Network (FinCEN), and the Securities and Exchange 
Commission are jointly adopting a final rule to implement section 326 
of the Uniting and Strengthening America by Providing Appropriate Tools 
Required to Intercept and Obstruct Terrorism Act of 2001. Section 326 
requires the Secretary of the Treasury to jointly prescribe with the 
Securities and Exchange Commission a regulation that, at a minimum, 
requires brokers or dealers to implement reasonable procedures to 
verify the identity of any person seeking to open an account, to the 
extent reasonable and practicable; to maintain records of the 
information used to verify the person's identity; and to determine 
whether the person appears on any lists of known or suspected 
terrorists or terrorist organizations provided to brokers or dealers by 
any government agency. This final regulation applies to brokers or 
dealers in securities except for brokers or dealers that register with 
the Securities and Exchange Commission solely because they effect 
transactions in securities futures products.

DATES: Effective Date: This rule is effective June 9, 2003.
    Compliance Date: Brokers or dealers subject to this final 
regulation must comply with it by October 1, 2003.

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

SUPPLEMENTARY INFORMATION:

I. Background

A. Section 326 of the USA PATRIOT Act

    On October 26, 2001, President Bush signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act or 
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).\2\ These 
provisions are intended to facilitate the prevention, detection, and 
prosecution of international money laundering and the financing of 
terrorism. Section 326 of the Act adds a new subsection (l) to 31 
U.S.C. 5318 of the BSA that requires the Secretary of the Treasury 
(Secretary or Treasury) to prescribe regulations ``setting forth the 
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 a financial institution.''
---------------------------------------------------------------------------

    \1\ Pub. L. 107-56.
    \2\ 31 U.S.C. 5311 et seq.
---------------------------------------------------------------------------

    Section 326 applies to all ``financial institutions.'' This term is 
defined broadly in the BSA to encompass a variety of entities, 
including commercial banks, agencies and branches of foreign banks in 
the United States, thrifts, credit unions, private banks, trust 
companies, brokers and dealers in securities, investment companies, 
futures commission merchants, insurance companies, travel agents, 
pawnbrokers, dealers in precious metals, check-cashers, casinos, and 
telegraph companies, among many others.\3\
---------------------------------------------------------------------------

    \3\ See 31 U.S.C. 5312(a)(2), 5312(c)(1)(A). For any financial 
institution engaged in financial activities described in section 
4(k) of the Bank Holding Company Act of 1956, the Secretary is 
required to prescribe the regulations issued under section 326 
jointly with 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 (collectively, the 
``banking agencies''), the Securities and Exchange Commission 
(Commission or SEC), and the Commodity Futures Trading Commission 
(CFTC).
---------------------------------------------------------------------------

    The regulations implementing section 326 must require, at a 
minimum, financial institutions to implement reasonable customer 
identification 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 
types of accounts maintained by different types of financial 
institutions, the various methods of opening accounts, and the types of 
identifying information that are available.

B. Overview of Comments Received

    On July 23, 2002, Treasury and the SEC jointly proposed a rule to 
implement section 326 with respect to brokers or dealers in securities 
(broker-dealers).\4\ We received 20 comments in

[[Page 25114]]

response to the proposal.\5\ Commenters included broker-dealers, 
financial services holding companies and trade associations. Commenters 
generally supported the proposal but suggested revisions.
---------------------------------------------------------------------------

    \4\ Customer Identification Programs for Broker-Dealers, 
Securities Exchange Act of 1934 Release No. 46192 (July 12, 2002), 
67 FR 48306 (July 23, 2002) (Notice of Proposed Rulemaking or NPRM). 
Treasury simultaneously published (1) jointly with the banking 
agencies, a proposed rule applicable to banks (as defined in 31 CFR 
103.11(c)) and foreign branches of insured banks; (2) a proposed 
rule applicable to credit unions, private banks and trust companies 
that do not have a federal functional regulator; (3) jointly with 
the SEC, a proposed rule applicable to mutual funds; and (4) jointly 
with the CFTC, a proposed rule applicable to futures commission 
merchants and introducing brokers. Customer Identification Programs 
for Banks, Savings Associations, and Credit Unions, 67 FR 48290 
(July 23, 2002); Customer Identification Programs for Certain Banks 
(Credit Unions, Private Banks and Trust Companies) That Do Not Have 
a Federal Functional Regulator, 67 FR 48299 (July 23, 2002); 
Customer Identification Programs for Mutual Funds, IC-25657 (July 
12, 2002), 67 FR 48318 (July 23, 2002); Customer Identification 
Programs for Futures Commission Merchants and Introducing Brokers, 
67 FR 48328 (July 23, 2002). Treasury, the Commission, the CFTC, and 
the banking agencies received approximately 500 comments in response 
to these proposed rules. Many of those commenters raised issues 
similar to those we received in connection with the proposal 
respecting broker-dealer customer identification programs.
    \5\ The comment letters are available for public inspection and 
copying in the SEC's Public Reference Room, 450 5th Street, NW., 
Washington, DC (File No. S7-25-02).
---------------------------------------------------------------------------

    Fifteen commenters addressed the proposed rule's definition of 
``customer.'' The inclusion in the definition of persons with authority 
over an account caused the greatest number of comments. The commenters 
provided several reasons why verifying this class of persons would be 
difficult. Many suggested using a risk-based approach. Commenters also 
suggested that the definition not include public companies, government 
agencies, investment advisors, investment advisor sub-account holders, 
beneficiaries of retirement accounts, or persons whose account 
relationship with the broker-dealer was limited to delivery-versus-
payment transactions.
    Twelve commenters addressed the proposed rule's recordkeeping 
requirements. The primary concern noted was the requirement to retain 
copies of documents used to verify the identities of customers. This 
was stated to be a substantial recordkeeping burden. Commenters 
suggested, as an alternative, requiring a record of the type of 
document used. Some commenters also were concerned about the 
requirement that these records be maintained until five years after the 
account is closed. They suggested shorter retention periods.
    Twelve commenters addressed the effective date of the proposed 
rule. They suggested varying implementation periods ranging from 90 
days to two years.
    Nine commenters addressed the verification requirement in the 
proposed rule. Several commenters suggested that existing customers or 
long-time acquaintances need not be verified. Others suggested 
additional verification methods such as using legal opinions and annual 
reports. Two commenters requested clarification that broker-dealers 
would not be responsible for verifying the validity of verification 
documents. One commenter requested clarification that customers could 
be verified using both documentary and non-documentary methods.
    Seven commenters addressed the proposed rule's definition of 
``account.'' Some requested that the definition only apply to accounts 
established to provide ongoing services. Others suggested that the 
definition should not include the sale of mutual funds or variable life 
products on a subscription way basis or dealer-to-dealer delivery-
versus-payment transactions.
    Seven commenters addressed the proposed rule's customer notice 
requirement. Three commenters suggested that the rule set forth model 
notice language. Two commenters suggested that the rule permit notice 
to be given within a reasonable time after the account is opened.
    Six commenters addressed the provision in the proposed rule 
permitting reliance between clearing and introducing broker-dealers. 
Generally, most of the commenters suggested the provision be expanded 
to allow for reliance between an executing dealer and prime broker and 
between a broker-dealer and its affiliates and other types of financial 
institutions such as banks, investment advisers and commodities firms.
    Three commenters addressed the requirement to collect minimum types 
of identifying information. One suggested that the rule not require a 
residential address since some persons may not have such an address. 
One suggested that the rule allow accounts to be opened even if all the 
required identifying information is not obtained, provided the broker-
dealer has a reasonable belief that it knows the true identity of the 
customer. One suggested that the requirement be risk-based.
    Three commenters addressed the requirement to check customers 
against terrorist lists. One suggested that FinCEN act as a 
clearinghouse for such lists. One suggested that the rule identify the 
lists that must be checked and specify which agencies can provide them. 
One suggested permitting the lists to be checked within a reasonable 
time after an account is opened and that the lists be provided in a 
single electronic format.
    One commenter addressed the proposed rule's definitions of ``U.S. 
person'' and ``Non-U.S. person.'' The commenter suggested that the rule 
use the definitions on certain Internal Revenue Service forms.
    One commenter expressed concern as to whether the Fair Credit 
Reporting Act (FCRA) would apply to verification database searches. It 
requested an exemption from the FCRA for such searches.
    We have modified the proposed rule in light of many of these 
comments and comments made with respect to the customer identification 
and verification rules being adopted for other financial institutions. 
The section-by-section analysis that follows discusses the comments and 
the modifications that we have made to the rule.

C. Codification of the Joint Final Rule

    The final rule is being issued jointly by Treasury, through FinCEN, 
and the SEC. It applies to any person that is registered or required to 
be registered with the Commission as a broker or dealer under the 
Securities Exchange Act of 1934 (Exchange Act),\6\ except persons who 
register solely for the purpose of effecting transactions in securities 
futures products.\7\ The substantive requirements of this joint final 
rule will be codified as part of Treasury's BSA regulations located in 
31 CFR Part 103.\8\ SEC Rule 17a-8 \9\ requires broker-dealers to 
comply with all reporting, recordkeeping and record retention 
requirements under the BSA. The final rule being adopted today falls 
directly within the scope of Rule 17a-8, and will be examined for, and 
enforced, by the Commission and appropriate self-regulatory 
organizations.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 77a et seq.
    \7\ Brokers or dealers that limit their securities business to 
effecting transactions in securities futures products may register 
with the Commission pursuant to 15 U.S.C 78o(b)(11). These persons 
will be subject to the customer identification rule being issued by 
the CFTC.
    \8\ The regulation will be codified at 31 CFR 103.122.
    \9\ 17 CFR 240.17a-8.
---------------------------------------------------------------------------

    Final rules governing the applicability of section 326 to certain 
other financial institutions, including banks, thrifts, credit unions, 
mutual funds and futures commission merchants, are being issued 
separately. Treasury, the SEC, the CFTC and the banking agencies 
consulted extensively in the development of all joint rules 
implementing section 326 of the Act. These participating agencies 
intend the effect of the final rules to be uniform throughout the 
financial services industry. Treasury intends to issue separate rules 
under section 326 for certain non-bank financial institutions that are 
not regulated by one of the Federal Functional regulators.

D. Compliance Date

    Many commenters requested that broker-dealers be given adequate 
time to develop and implement the requirements of any final rule 
implementing section 326. The transition periods suggested by

[[Page 25115]]

commenters ranged from 90 days to two years after the publication of a 
final rule.
    The final rule modifies various aspects of the proposed rule and 
eliminates some of the requirements that commenters identified as being 
most burdensome. Nonetheless, we recognize that some broker-dealers 
will need time to develop and implement the customer identification 
program (CIP) required under the rule, as doing so may include various 
measures, such as training staff, reprinting forms, and programming 
automated systems. Accordingly, although this rule will be effective 30 
days after publication, broker-dealers will have a transition period to 
implement the rule. Broker-dealers must fully implement their CIPs 
under the final rule by October 1, 2003.\10\
---------------------------------------------------------------------------

    \10\ The CIP rules issued by the other Federal functional 
regulators also have an implementation date of October 1, 2003.
---------------------------------------------------------------------------

II. The Joint Final Rule

A. Section-by-Section Analysis

Section 103.122(a) Definitions

    Section 103.122(a)(1) Account. We proposed to define ``account'' as 
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.\11\
---------------------------------------------------------------------------

    \11\ The proposed rule text is set forth in the NPRM, 67 FR at 
48317.
---------------------------------------------------------------------------

    Four commenters suggested that the definition of ``account'' 
incorporate the concept of ongoing relationships to make it consistent 
with the rules proposed by the banking agencies. The bank rules limited 
the definition of ``account'' to ``ongoing transactions'' to 
specifically address situations where a person obtains certain services 
or products from a bank such as cashing or buying a check or purchasing 
a wire transfer or money order. In the final rules being issued by 
Treasury and the banking agencies, the definition of account no longer 
contains the term ``ongoing.'' Instead, the definition of ``account'' 
now specifically excludes these types of products or services or any 
others where a ``formal banking relationship'' is not established with 
the person.\12\ They are being excluded because, standing alone, they 
do not establish a formal banking relationship. Moreover, they 
generally are covered by other provisions of the BSA.\13\ Except in 
conjunction with an established securities account, broker-dealers do 
not offer products or services similar to those excluded in the bank 
rules. Thus, we did not include the term ``ongoing'' in the definition 
of account or adopt the specific exclusion included in the bank 
rule.\14\
    Two commenters requested clarification as to whether the sale of 
mutual fund shares or variable life annuities on a subscription way 
basis constituted an account relationship, given that the broker-
dealer's role in the transactions could be considered limited. We 
believe these transactions can give rise to an account relationship 
and, therefore, have not excluded them specifically from the definition 
of account. However, changes we made to the reliance and recordkeeping 
sections of the rule address many of the concerns raised by these 
commenters.\15\
---------------------------------------------------------------------------

    \12\ See 31 CFR 103.121(a)(1).
    \13\ For example, 31 CFR 103.29 requires banks to obtain and 
verify identifying information of any person who purchases a bank 
check or draft, cashier's check, money order or traveler's check of 
$3,000 or more.
    \14\ See final rule, paragraph (a)(1)(i).
    \15\ The changes--discussed later in the Release--permit broker-
dealers to rely on mutual funds to perform the CIP requirements and 
eliminate the requirement to retain a copy of documents used to 
verify the identity of a customer.
---------------------------------------------------------------------------

    We also have removed the word ``business'' from the definition of 
account. This change is made to clarify further that the rule applies 
to relationships established for the purpose of effecting securities 
transactions as opposed to general business dealings, such as those 
established in connection with a broker-dealer's own operations or 
premises.
    The definition of ``account'' in the proposed rule contained a 
second sentence setting forth examples of the types of accounts that 
would constitute an ``account'' for the purposes of the rule.\16\ The 
examples--cash accounts, margin accounts, prime brokerage accounts and 
accounts established to engage in securities repurchase transactions--
were not intended to be an exhaustive list. These types of accounts 
remain ``accounts'' for the purposes of the final rule. However, the 
final rule text no longer specifically cites them as examples in order 
to make clear that the list was not exhaustive.\17\
---------------------------------------------------------------------------

    \16\ See NPRM, 67 FR at 48317.
    \17\ See final rule, paragraph (a)(1)(i).
---------------------------------------------------------------------------

    The final rule now contains two exclusions from the definition of 
``account.'' The first is for certain transferred accounts.\18\ The 
Notice of Proposed Rulemaking stated that transfers of accounts from 
one broker-dealer to another were outside the definition of ``account'' 
for purposes of the proposed rule.\19\ The final rule codifies and 
expands this exception, by excluding from the definition of ``account'' 
any account that a broker-dealer acquires through an acquisition, 
merger, purchase of assets, or assumption of liabilities. Customers do 
not initiate these transfers and, therefore, the accounts do not fall 
within the scope of section 326.\20\ Transfers may, however, fall 
within the broader scope of the anti-money laundering program rules 
required under section 352 of the USA PATRIOT Act.\21\ Accordingly, in 
developing and implementing programs under section 352, broker-dealers 
should consider situations where it would be appropriate to verify the 
identity of customers associated with transferred accounts.\22\
---------------------------------------------------------------------------

    \18\ See final rule, paragraph (a)(1)(ii)(A).
    \19\ See NPRM, Section II.A, 67 FR at 48307.
    \20\ Transfers of accounts that result from an introducing 
broker-dealer changing its clearing firm would fall within this 
exclusion. However, the introducing firm and the new clearing firm 
would need to meet the requirements in paragraph (b)(6) (such as 
entering into a contract and providing certifications) to the extent 
they intend to rely on each other to undertake CIP requirements with 
respect to customers that open accounts after the transfer.
    \21\ 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.
    \22\ For example, it may be appropriate to verify transferred 
accountholders if the accounts are coming from a broker-dealer that 
was found to have failed to establish or maintain an adequate CIP.
---------------------------------------------------------------------------

    The rule also now excludes from the definition of ``account'' 
accounts opened for the purpose of participating in an employee benefit 
plan established pursuant to the Employee Retirement Income Security 
Act of 1974.\23\ Seven commenters recommended that the rule not cover 
these types of accounts. These accounts are less susceptible to be used 
for the financing of terrorism and money laundering because, among 
other reasons, they are funded through payroll deductions in connection 
with employment plans that must comply with federal regulations. These 
regulations impose, among other requirements, low contribution limits 
and strict distribution requirements.
---------------------------------------------------------------------------

    \23\ Final rule, paragraph (a)(1)(ii)(B).
---------------------------------------------------------------------------

    Section 103.122(a)(2) Broker-dealer. We proposed to define 
``broker-dealer'' as any person registered or required to

[[Page 25116]]

be registered with the Commission, except persons who register solely 
to effect transactions in securities futures products.\24\ There were 
no comments on this definition and we are adopting it as proposed.\25\
---------------------------------------------------------------------------

    \24\ See NPRM, 67 FR at 48317.
    \25\ See final rule, paragraph (a)(2).
---------------------------------------------------------------------------

    Section 103.122(a)(3) Commission. We proposed to define 
``Commission'' as the United States Securities and Exchange 
Commission.\26\ There were no comments on this definition and we are 
adopting it as proposed.\27\
---------------------------------------------------------------------------

    \26\ See NPRM, 67 FR at 48317.
    \27\ See final rule, paragraph (a)(3).
---------------------------------------------------------------------------

    Section 103.122(a)(4) Customer. We proposed ``customer'' to mean 
any person who opens a new account with a broker-dealer, and any person 
granted authority to effect transactions in an account.\28\ Fifteen 
commenters expressed concern about the proposed definition. Nine 
commenters suggested that the definition not include persons with 
authority over accounts. Some suggested that these persons be excluded 
from the definition entirely while others proposed using a risk-based 
approach. Seven commenters suggested that the sponsors of employee 
benefit plans be considered customers, rather than the beneficiaries. 
Three commenters suggested that the definition of ``customer'' exclude 
beneficiaries of trust and escrow accounts. Three commenters suggested 
that the definition exclude beneficiaries of omnibus accounts. Two 
commenters suggested that the definition exclude persons who are 
allocated portions of delivery-versus-payment securities transactions 
at the direction of an investment advisor. One commenter suggested that 
the definition may not capture registered owners of an account if 
someone else undertook the necessary steps to open the account for the 
owners. One commenter suggested that the definition exclude banks, 
government agencies and public companies. We have addressed most of 
these comments and other issues through revisions to the definition of 
customer and through changes made to other sections of the rule.
---------------------------------------------------------------------------

    \28\ See NPRM, 67 FR at 48317.
---------------------------------------------------------------------------

    For consistency with the Act, the final rule defines ``customer'' 
as ``a person that opens a new account.'' \29\ This means the person 
identified as the accountholder, except in the case of minors and non-
legal entities. It does not refer to persons who fill out the account 
opening paperwork or provide information necessary to set up an 
account, if such persons are not the accountholder as well. Thus, under 
this rule, a broker-dealer is not required to look through a trust, or 
similar account to its beneficiaries, and is required only to verify 
the identity of the named accountholder.\30\ Similarly, with respect to 
an omnibus account established by an intermediary, a broker-dealer is 
not required to look through the intermediary to the underlying 
beneficial owners, if the intermediary is identified as the 
accountholder.\31\
    As mentioned, we received the greatest number of comments for 
defining persons with authority over an account as ``customers.'' This 
component of the companion CIP rules proposed for banks, mutual funds 
and commodities firms also garnered a great deal of comment. Commenters 
asserted that the proposal in this respect was overbroad and unduly 
burdensome, and would not further the goals of the statute.\32\ Some 
commenters did acknowledge that a risk-based approach would be 
appropriate.
---------------------------------------------------------------------------

    \29\ Final rule, paragraph (a)(4)(i)(A).
    \30\ However, as discussed below, under paragraph (b)(2)(ii)(C) 
of the final rule, a broker-dealer, based on its risk-assessment of 
a new account, may need to take additional steps to verify the 
identity of a customer that is not an individual, such as obtaining 
information about persons with control over the account. In 
addition, the due diligence procedures required under other 
provisions of the BSA or the securities laws may require broker-
dealers to look through to owners of certain types of accounts.
    \31\ The final rule does not affect any requirements under 17 
CFR 240.17a-3(a)(9) to make records with respect to the beneficial 
owners of certain accounts.
    \32\ For example, commenters pointed out that corporations and 
other entities may have a substantial number of individuals 
authorized to act on their behalf, and that administrative personnel 
and other individuals acting on the entity's behalf may pose a 
minimal risk of money laundering, especially when the entity is a 
publicly traded company. Several commenters emphasized that 
requiring an individual employee to disclose personal information to 
all of the employer's financial institutions may be an unwarranted 
intrusion into the privacy of those individuals, increasing their 
risk of becoming victims of identity theft.
---------------------------------------------------------------------------

    After revisiting this component of the ``customer'' definition, we 
have determined that requiring limited resources to be expended on 
verifying the identities of persons with authority over accounts could 
interfere with a broker-dealer's ability to focus on identifying 
customers and accounts that present a higher risk of not being properly 
identified. Accordingly, the final rule does not include persons with 
authority over accounts in the definition of ``customer.'' \33\ 
Instead, paragraph (b)(2)(ii)(C) of the final rule requires a broker-
dealer's CIP to address situations where the broker-dealer will take 
additional steps to verify the identity of a customer that is not an 
individual by seeking information about individuals with authority or 
control over the account in order to verify the customer's identity.
---------------------------------------------------------------------------

    \33\ See final rule, paragraph (a)(4).
---------------------------------------------------------------------------

    The definition of ``customer'' has been revised to clarify the 
treatment of minors and informal groups (non-legal entities) with a 
common interest (e.g., civic clubs).\34\ In the case of a minor or 
informal group, the ``customer'' for purposes of the rule is the 
individual who undertakes to open the account in the name of the minor 
or the group. Generally, this will be the person who fills out the 
account opening paperwork and provides the information necessary to set 
up the account in the name of the minor or group.
---------------------------------------------------------------------------

    \34\ See final rule, paragraph (a)(4)(i)(B).
---------------------------------------------------------------------------

    In order to make the rule less burdensome, the final rule excludes 
from the definition of ``customer'' certain readily identifiable 
entities, including: (1) Financial institutions regulated by a federal 
functional regulator; (2) banks regulated by a state bank regulator; 
and (3) persons described in section 103.22(d)(2)(ii)-(iv) of the BSA 
regulations. These excluded persons include entities such as 
governmental agencies and instrumentalities and companies that are 
publicly traded.\35\ The definition of ``customer'' also excludes a 
person who has an existing account with the broker-dealer, provided 
that the broker-dealer has a reasonable belief that it knows the true 
identity of the person.
---------------------------------------------------------------------------

    \35\ See final rule, paragraph (a)(4)(ii). Section 
103.22(d)(2)(iv) exempts publicly traded companies only to the 
extent of their domestic operations. Accordingly, a broker-dealer's 
CIP will apply to any foreign offices, affiliates, or subsidiaries 
of such entities that open new accounts.
---------------------------------------------------------------------------

    Section 103.122(a)(5) Federal functional regulator. We have added a 
definition of ``Federal functional regulator'' to the final rule.\36\ 
The term is used in connection with the new provision in the rule 
allowing broker-dealers to rely on certain other financial 
institutions.\37\ One of the requirements for such reliance is that the 
other financial institution be regulated by a Federal functional 
regulator. The final rule uses the definition of ``Federal functional 
regulator'' in section 103.120(a)(2) of the BSA regulations, meaning 
each of the banking agencies, the SEC and the CFTC.
---------------------------------------------------------------------------

    \36\ Final rule, paragraph (a)(5).
    \37\ See final rule, paragraph (b)(6).
---------------------------------------------------------------------------

    Section 103.122(a)(6) Financial institution. We have added a 
definition of ``financial institution'' to the final rule.\38\ The term 
is used in connection with the new provision in the rule allowing 
broker-dealers to rely on

[[Page 25117]]

certain other ``financial institutions.'' The definition of ``financial 
institution'' cross-references the BSA, 31 U.S.C. 5312(a)(2) and 
(c)(1). This is a more expansive definition of ``financial 
institution'' than that in section 103.11 of the BSA regulations, and 
includes entities such as commodities firms.
---------------------------------------------------------------------------

    \38\ Final rule, paragraph (a)(6).
---------------------------------------------------------------------------

    Section 103.122(a)(7) Taxpayer identification number. The proposed 
rule contained a definition of ``taxpayer identification number'' 
because that term is used later in the rule with respect to the types 
of information broker-dealers must collect from customers.\39\ The term 
was defined by referencing the provisions of section 6109 of the 
Internal Revenue Code of 1986 and the regulations of the Internal 
Revenue Service (IRS) promulgated under that act. There were no 
comments on this approach and, therefore, we have adopted it as 
proposed.\40\
---------------------------------------------------------------------------

    \39\ See NPRM, 67 FR at 48317.
    \40\ See final rule, paragraph (a)(7).
---------------------------------------------------------------------------

Section 103.122(a)(8) U.S. Person and Sec.  103.131(a)(9) Non-U.S. 
Person

    The proposed rule defined ``U.S. person'' as an individual who is a 
U.S. citizen, or an entity established or organized under the laws of a 
State or the United States.\41\ A ``non-U.S. person'' was defined as a 
person who did not satisfy either of these criteria.\42\ One commenter 
suggested that the definitions of ``U.S. person'' and ``non-U.S. 
person'' should comport with the definitions in certain IRS forms.
---------------------------------------------------------------------------

    \41\ The proposed rule contained a definition of ``person'' that 
cross-referenced the definition in section 103.11(z) of the BSA 
regulations. Since the final rule is being codified in 31 CFR Part 
103, it will incorporate the definition in section 103.11(z) without 
the need for a specific citation. Therefore, the citation has been 
removed from the final rule. The definition of ``person'' in section 
103.11(z) applicable to the final rule is: ``an individual, a 
corporation, a partnership, a trust or estate, a joint stock 
company, an association, a syndicate, joint venture, or other 
unincorporated organization or group, an Indian tribe (as that term 
is defined in the Indian Gaming Regulatory Act), and all entities 
cognizable as legal personalities.''
    \42\ As described in greater detail below, a broker-dealer is 
generally required to obtain a U.S. taxpayer identification number 
from a customer who opens a new account. However, if the customer is 
a non-U.S. person and does not have such a number, the broker-dealer 
may obtain an identification number from some other form of 
government-issued document evidencing nationality or residence and 
bearing a photograph or similar safeguard.
---------------------------------------------------------------------------

    We believe that the proposed definitions of ``U.S. person'' and 
``Non-U.S. person'' are better standards for purposes of this final 
rule than the IRS definitions. Adoption of the IRS definition of ``U.S. 
person'' would require broker-dealers to distinguish among various tax 
and immigration categories in connection with any type of account that 
is opened. Under the proposed definition, a broker-dealer will not 
necessarily need to establish whether a potential customer is a U.S. 
citizen. The broker-dealer will have to ask each customer for a U.S. 
taxpayer identification number (social security number, employer 
identification number, or individual taxpayer identification number). 
If a customer cannot provide one, the broker-dealer may then accept 
alternative forms of identification. Therefore, the definitions are 
adopted as proposed.\43\
---------------------------------------------------------------------------

    \43\ See final rule, paragraphs (a)(8) and (a)(9).
---------------------------------------------------------------------------

Section 103.122(b) Customer Identification Program: Minimum 
Requirements

Section 103.122(b)(1) In General

    We proposed to require that each broker-dealer establish, document, 
and maintain a written CIP as part of its required anti-money 
laundering (AML) program,\44\ and that the procedures of the CIP enable 
the broker-dealer to form a reasonable belief that it knows the true 
identity of a customer.\45\ The CIP procedures were to be based on the 
type of identifying information available and on an assessment of 
relevant risk factors, including the broker-dealer's size; location and 
methods of opening accounts, the types of accounts maintained for 
customers and types of transactions executed for customers, and the 
broker-dealer's reliance on another broker-dealer.\46\
---------------------------------------------------------------------------

    \44\ NASD Rule 3011 and NYSE Rule 445 set forth minimum 
requirements for these programs.
    \45\ See NPRM, 67 FR at 48317.
    \46\ Id.
---------------------------------------------------------------------------

    The NPRM discussed these risk factors and explained that, although 
the rule requires certain minimum identifying information and suitable 
verification methods, broker-dealers should consider on an ongoing 
basis whether other information or methods are appropriate, 
particularly as they become available in the future.\47\ Commenters 
generally supported the approach of the proposed general CIP 
requirements.
---------------------------------------------------------------------------

    \47\ See NPRM, Section II.B, 67 FR at 48307-48308.
---------------------------------------------------------------------------

    In the final rule, paragraph (b)(1) continues to set forth the 
general requirement that a broker-dealer must establish, document, and 
maintain a written CIP as part of its required AML program. It now 
provides that the CIP should be appropriate for the broker-dealer's 
size and business and that, at a minimum, it must contain the 
requirements set forth in paragraphs (b)(1) through (b)(5) (which are 
discussed below). The final rule was re-organized in order to be 
structurally consistent with the rules being issued by the banking 
agencies. Thus, requirements that had been set forth in paragraphs (c), 
(d), (e), (f), (g) and (h) in the proposed rule are now contained in 
paragraphs (b)(2) through (b)(5) of the final rule to the extent they 
have been adopted.\48\ The rule's structure was changed in order to 
avoid causing confusion by having different looking rules and to affirm 
the intent of Treasury and the Federal functional regulators that all 
the CIP rules impose the same requirements.
---------------------------------------------------------------------------

    \48\ Paragraph (b)(6) of the final rule is not specified as a 
minimum CIP requirement because it contains the provisions 
permitting broker-dealers to rely on another financial institution. 
Reliance under this paragraph is optional.
---------------------------------------------------------------------------

    Finally, the reference to risk factors has been moved to paragraph 
(b)(2) of the final rule, which requires broker-dealers to establish 
identity verification procedures. This change was made to highlight 
that the risk factors should be considered specifically when developing 
identification verification procedures.\49\
---------------------------------------------------------------------------

    \49\ The other requirements of the final rule--such as providing 
notice to customers, checking government lists, and recordkeeping--
are standard requirements that may not vary depending on risk 
factors.
---------------------------------------------------------------------------

Section 103.122(b)(2) Identity Verification Procedures

    We proposed to require that a broker-dealer's CIP include 
procedures for verifying the identity of customers, to the extent 
reasonable and practicable, using information specified in the rule, 
and that such verification 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.\50\ 
Commenters supported these general requirements, although several 
commenters recommended greater use of a risk-based approach.
---------------------------------------------------------------------------

    \50\ See NPRM, 67 FR at 48317.
---------------------------------------------------------------------------

    The final rule continues to strike a balance between flexibility 
and detailed guidance, and we are adopting the provisions on identity 
verification procedures substantially as proposed.\51\ Under the final 
rule, a broker-dealer's CIP must include risk-based procedures for 
verifying the identity of each customer to the extent reasonable and 
practicable.\52\ Such procedures must enable the broker-dealer to form 
a reasonable belief that it knows the true identity of each 
customer.\53\ The procedures must be based on the broker-dealer's 
assessment of the relevant risks, including those presented by the

[[Page 25118]]

various types of accounts maintained by the broker-dealer, the various 
methods of opening accounts provided by the broker-dealer, the various 
types of identifying information available and the broker-dealer's 
size, location and customer base.\54\
---------------------------------------------------------------------------

    \51\ See final rule, paragraph (b)(2).
    \52\ Id.
    \53\ Id.
    \54\ Id.
---------------------------------------------------------------------------

Section 103.122(b)(2)(i) Customer Information Required

    The proposed rule would have required a broker-dealer's CIP to 
require the firm to obtain certain identifying information about each 
customer, including, at a minimum: (1) Name; (2) date of birth, for a 
natural person; (3) certain addresses; \55\ and (4) identification 
number.\56\ The NPRM further stated that in certain circumstances a 
broker-dealer should obtain additional identifying information, and 
that the CIP should set forth guidelines regarding those circumstances 
and the additional information that should be obtained.\57\
---------------------------------------------------------------------------

    \55\ We proposed to require broker-dealers to obtain residence 
and mailing addresses (if different) for a natural person, or 
principal place of business and mailing address (if different) for a 
person other than a natural person. See NPRM, 67 FR at 48317.
    \56\ We proposed to require broker-dealers to obtain: (1) For a 
customer that is a U.S. person, a taxpayer identification number, or 
(2) for a customer that is not a U.S. person, a taxpayer 
identification number, passport number and country of issuance, 
alien identification card number, or number and country of issuance 
of any other government-issued document evidencing nationality or 
residence and bearing a photograph or similar safeguard. See NPRM, 
67 FR at 48317.
    \57\ See NPRM, Section II.C, 67 FR at 48308-48309.
---------------------------------------------------------------------------

    Three commenters submitted comments on the required information 
component of the proposed rule. One commenter pointed out that certain 
persons may not have permanent residential addresses because they are 
military personnel living overseas or are living on boats. This 
commenter suggested the rule only require that a mailing address be 
obtained. Another commenter suggested that the rule permit broker-
dealers to open an account even if all the minimum identifying 
information is not obtained, provided the broker-dealer has a 
reasonable belief that it knows the customer's true identity. The final 
commenter suggested the rule be risk-based with respect to the required 
minimum information. This commenter also stated that the rule should 
require a mailing address only.
    We are adopting the customer information provisions substantially 
as proposed with changes to accommodate individuals who may not have 
physical addresses.\58\ We believe the minimum required information is 
collected by most broker-dealers already, is necessary for the 
verification process and serves an important law enforcement function. 
Accordingly, prior to opening an account, a broker-dealer must obtain, 
at a minimum, a customer's (1) name; (2) date of birth, for an 
individual; (3) address; and (4) identification number.\59\ The address 
must be (1) for an individual, a residential or business street 
address, or for an individual who does not have a residential or 
business street address, an Army Post Office or Fleet Post Office box 
number, or the residential or business street address of next of kin or 
another contact individual; or (2) for a person other than an 
individual, a principal place of business, local office or other 
physical location.\60\
---------------------------------------------------------------------------

    \58\ Final rule, paragraph (b)(2)(i)(A).
    \59\ Based on an assessment of the relevant risk factors, the 
broker-dealer's CIP may require a customer to provide additional 
information to establish the customer's identity.
    \60\ Final rule, paragraph (b)(2)(i)(A)(3).
---------------------------------------------------------------------------

    We are adopting the identification number requirement substantially 
as proposed.\61\ For a customer that is a U.S. person, the 
identification number is a taxpayer identification number (social 
security number or employer identification number).\62\ For a customer 
that is not a U.S. person, the identification number is one or more of 
the following: A taxpayer identification number, passport number and 
country of issuance, alien identification card number, or number and 
country of issuance of any other government-issued document evidencing 
nationality or residence and bearing a photograph or similar 
safeguard.\63\ This provision provides a broker-dealer with some 
flexibility to choose among a variety of information numbers that it 
may accept from a non-U.S. person.\64\ However, the identifying 
information the broker-dealer accepts must permit the firm to form a 
reasonable belief that it knows the true identity of the customer.\65\
---------------------------------------------------------------------------

    \61\ See NPRM, 67 FR at 48317.
    \62\ Final rule, paragraph (b)(2)(i)(A)(4).
    \63\ Id.
    \64\ The final rule provides this flexibility because there is 
no uniform identification number that non-U.S. persons would be able 
to provide to a broker-dealer. See Treasury Department, ``A Report 
to Congress in Accordance with Section 326(b) of the USA PATRIOT 
Act,'' October 21, 2002.
    \65\ We emphasize that the rule neither endorses nor prohibits a 
broker-dealer from accepting information from particular types of 
identification documents issued by foreign governments. The broker-
dealer must determine, based upon appropriate risk factors, 
including those discussed above, whether the information presented 
by a customer is reliable. We recognize that a foreign business or 
enterprise may not have an identification number. Therefore the 
final rule notes that when opening an account for such a customer, 
the broker-dealer must request alternative government-issued 
documentation certifying the existence of the business or 
enterprise.
---------------------------------------------------------------------------

    The proposed rule included an exception from the requirement to 
obtain a taxpayer identification number from a customer opening a new 
account.\66\ The exception would have allowed a broker-dealer to open 
an account for a person that has applied for, but has not yet received, 
an employer identification number (EIN).\67\ We are adopting an 
expanded version of this exception in the final rule.\68\ As proposed, 
the exception was limited to persons that are not natural persons.\69\ 
On further consideration, we have determined that it is appropriate to 
expand the exception to include natural persons who have applied for, 
but have not received, a taxpayer identification number.\70\ We also 
have modified the exception to reduce the recordkeeping burden. The 
proposed rule would have required the broker-dealer to retain a copy of 
the customer's application for a taxpayer identification number.\71\ 
The final rule permits the broker-dealer to exercise discretion to 
determine how to confirm that a person has filed an application.\72\
---------------------------------------------------------------------------

    \66\ See NPRM, 67 FR at 48317.
    \67\ This position is analogous to that in regulations issued by 
the Internal Revenue Service (IRS) concerning ``awaiting-TIN 
[taxpayer identification number] certificates.'' The IRS permits a 
taxpayer to furnish an ``awaiting-TIN certificate'' in lieu of a 
taxpayer identification number to exempt the taxpayer from the 
withholding of taxes owed on reportable payments (i.e. interest and 
dividends) on certain accounts. See 26 CFR 31.3406(g)-3.
    \68\ See final rule, paragraph (b)(2)(i)(B).
    \69\ In the NPRM, we explained that the exception was for new 
businesses that may need to open a brokerage account before they 
receive an EIN from the Internal Revenue Service. See NPRM, Section 
II.C, 67 FR at 48309.
    \70\ Final rule, paragraph (b)(2)(i)(B).
    \71\ See NPRM, 67 FR at 48317.
    \72\ The broker-dealer's CIP must include procedures to confirm 
that the application was filed before the person opens the account 
and to obtain the taxpayer identification number within a reasonable 
period of time after the account is opened.
---------------------------------------------------------------------------

Section 103.122(b)(2)(ii) Customer Verification

    We proposed to require that a broker-dealer's CIP include 
procedures for verifying the identity of customers, to the extent 
reasonable and practicable, using the information obtained under the 
rule.\73\ We also proposed to require such verification to 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.\74\ The NPRM stated that a broker-dealer need not verify 
each piece of identifying information if it is able to form a 
reasonable belief that it knows

[[Page 25119]]

the customer's identity after verifying only certain of the 
information.\75\ The NPRM also stated that the flexibility to undertake 
verification within a reasonable time must be exercised in a reasonable 
manner.\76\ It noted 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, and that 
the appropriate amount of time may depend on the type of account 
opened, whether the customer opens the account in person, and the type 
of identifying information available.\77\
---------------------------------------------------------------------------

    \73\ See NPRM, 67 FR at 48317.
    \74\ Id.
    \75\ NPRM, Section II.D, 67 FR at 48309.
    \76\ Id.
    \77\ Id.
---------------------------------------------------------------------------

    Five commenters suggested that the rule should not require existing 
customers to be verified. Two of these commenters also pointed out that 
a second account is not created when a customer changes a cash account 
into a margin account. Accordingly, they argued that the changing of a 
cash account into a margin account should not be considered the opening 
of a new account. As discussed above, the definition of ``customer'' in 
the final rule has been changed to exclude persons who have an existing 
account at the broker-dealer, provided the broker-dealer has a 
reasonable belief that it knows the customer's true identity. 
Accordingly, broker-dealers will not be required to verify the 
identities of such persons. One commenter also suggested that the rule 
should not require broker-dealers to verify the identities of personal 
acquaintances.
    The final rule adopts the customer verification requirements 
substantially as proposed, with modifications that conform this 
provision of the final rule to the revised definition of ``customer,'' 
described above. The final rule requires that the CIP contain 
procedures for verifying the identity of the customer, using the 
customer information obtained in accordance with paragraph (b)(2)(i), 
within a reasonable time before or after the account is opened.\78\ The 
final rule does not require the identity of a person granted authority 
to effect transactions in an account to be verified.
---------------------------------------------------------------------------

    \78\ Final rule, paragraph (b)(2)(ii).
---------------------------------------------------------------------------

    As stated in the NPRM, broker-dealers must reasonably exercise the 
flexibility to undertake verification before or after an account is 
opened. The amount of time may depend on various factors, such as the 
type of account opened, whether the customer opens the account in-
person, and the type of identifying information that is available.\79\
---------------------------------------------------------------------------

    \79\ It is possible, however, that a broker-dealer would violate 
other laws by permitting a customer to transact business prior to 
verifying the customer's identity. See, e.g., 31 CFR Part 500 
(regulations of Treasury's Office of Foreign Asset Control 
prohibiting transactions involving designated foreign countries or 
their nationals).
---------------------------------------------------------------------------

    The final rule also requires that a broker-dealer's CIP include 
procedures that describe when the firm will use documents, non-
documentary methods, or a combination of both to verify customer 
identities.\80\ 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, and 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 relevant risk factors.
---------------------------------------------------------------------------

    \80\ Final rule, paragraph (b)(2)(ii).
---------------------------------------------------------------------------

    Finally, with respect to the comment on personal acquaintances, we 
believe it would be inappropriate to provide special treatment for such 
customers. The rule is sufficiently flexible to make their verification 
as unobtrusive as possible.

Section 103.122(b)(2)(ii)(A) Customer Verification--Through Documents

    We proposed to require that a broker-dealer's CIP describe 
documents that the firm will use to verify customers' identities.\81\ 
Suitable documents for verification would include: (1) For natural 
persons, unexpired government-issued identification evidencing 
nationality or residence and bearing a photograph or similar safeguard; 
and (2) for persons other than natural persons, documents showing the 
existence of the entity, such as certified articles of incorporation, a 
government-issued business license, a partnership agreement, or a trust 
instrument.
---------------------------------------------------------------------------

    \81\ See NPRM, 67 FR at 48317.
---------------------------------------------------------------------------

    Three commenters submitted comments on this aspect of the rule. Two 
commenters sought clarification that broker-dealers will not be 
responsible for ensuring the validity of verifying documents. One 
commenter suggested that certificates of trust and legal opinions 
should be suitable documents for verification.
    The final rule attempts to strike an appropriate balance between 
the benefits of requiring additional documentary verification and the 
burdens that may arise from such a requirement. The final rule requires 
a broker-dealer's CIP to contain procedures that set forth the 
documents that the firm will use for verification.\82\ Each broker-
dealer will conduct its own risk-based analysis of the types of 
documents that it believes will enable it to verify the true identities 
of customers.
---------------------------------------------------------------------------

    \82\ Final rule, paragraph (b)(ii)(A).
---------------------------------------------------------------------------

    In light of recent increases in identity theft and the availability 
of fraudulent documents, we believe that the value of documentary 
verification is enhanced by redundancy. The rule gives examples of 
types of documents that are considered reliable.\83\ However, we 
encourage broker-dealers to obtain more than one type of documentary 
verification to ensure that it has a reasonable belief that it knows 
the customer's true identity. Moreover, we encourage broker-dealers to 
use a variety of methods to verify the identity of a customer, 
especially when the broker-dealer does not have the ability to examine 
original documents.
---------------------------------------------------------------------------

    \83\ Id. Other documents, such as the trust certificates and 
legal opinions suggested by one commenter, also may be appropriate 
for verification. The list in the rule is meant to be illustrative.
---------------------------------------------------------------------------

    The final rule continues to include, without significant change, an 
illustrative list of identification documents.\84\ A broker-dealer may 
use other documents, provided they allow the firm to establish a 
reasonable belief that it knows the true identity of the customer. In 
addition to the risk factors described in paragraph (b)(2), the broker-
dealer should take into account the problems of authenticating 
documents and the inherent limitations of documents as a means of 
identity verification. These limitations will affect the types of 
documents that will be necessary to establish a reasonable belief that 
the broker-dealer knows the true identity of the customer, and may 
require the use of non-documentary methods in addition to documents.
---------------------------------------------------------------------------

    \84\ For an individual, these documents may include unexpired 
government-issued identification evidencing nationality or residence 
and bearing a photograph or similar safeguard, such as a driver's 
license or passport. Final rule, paragraph (b)(2)(ii)(A)(1). For a 
person other than an individual, these documents may include 
documents showing the existence of the entity, such as certified 
articles of incorporation, a government-issued business license, a 
partnership agreement, or a trust instrument. Final rule, paragraph 
(b)(2)(ii)(A)(2).
---------------------------------------------------------------------------

    Finally, with respect to the comments on ensuring the validity of 
documents, once a broker-dealer obtains and verifies the identity of a 
customer through a document, such as a driver's license or passport, 
the firm is not required to take steps to determine whether the 
document has been validly issued. A broker-dealer generally may rely on

[[Page 25120]]

government issued identification as verification of a customer's 
identity; however, if a document shows obvious indications of fraud, 
the broker-dealer must consider that factor in determining whether it 
can form a reasonable belief that it knows the customer's true 
identity.

Section 103.122(b)(2)(ii)(B) Customer Verification--Through Non-
Documentary Methods

    We proposed to require a broker-dealer's CIP to describe the non-
documentary methods the broker-dealer would use to verify customers' 
identities and when the firm would use these methods in addition to, or 
instead of, relying on documents.\85\ We explained that the proposed 
rule allowed the exclusive use of non-documentary methods because some 
accounts are opened by telephone, mail, or over the Internet.\86\ We 
also noted that, even if the customer presents identification 
documents, it might be appropriate to use non-documentary methods as 
well.\87\
---------------------------------------------------------------------------

    \85\ See NPRM, 67 FR at 48317.
    \86\ See NPRM, Section II.D.2, 67 FR at 48310.
    \87\ Id.
---------------------------------------------------------------------------

    The proposed rule provided examples of non-documentary verification 
methods that a broker-dealer may use, including: Contacting a customer; 
independently verifying information through credit bureaus, public 
databases, and other sources; and checking references with other 
financial institutions. In the NPRM, we observed that broker-dealers 
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.\88\
---------------------------------------------------------------------------

    \88\ Id.
---------------------------------------------------------------------------

    We proposed to require broker-dealers to use non-documentary 
methods when: (1) A customer who is a natural person cannot present an 
unexpired, government-issued identification document that bears a 
photograph or similar safeguard; (2) the broker-dealer is presented 
with unfamiliar documents to verify the identity of a customer; or (3) 
the broker-dealer does not obtain documents to verify the identity of a 
customer, does not meet face-to-face with 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.\89\ In the NPRM, we explained that we 
recognize that identification documents may be obtained illegally and 
may be fraudulent.
---------------------------------------------------------------------------

    \89\ See NPRM, 67 FR at 48317.
---------------------------------------------------------------------------

    In light of the recent increase in identity theft, we encouraged 
broker-dealers to use non-documentary methods even when the customer 
has provided identification documents.\90\
---------------------------------------------------------------------------

    \90\ See NPRM, Section II.D.2, 67 FR at 48310.
---------------------------------------------------------------------------

    One commenter requested that we clarify that account applicants who 
are not physically present at an account opening may be treated under 
the broker-dealer's non-documentary verification methods.\91\ One 
commenter sought clarification that a broker-dealer is not prohibited 
from using both documentary methods in conjunction with non-documentary 
methods.\92\ One commenter suggested that public databases, such as the 
SEC's EDGAR system, should be considered a suitable source of non-
documentary verification. One commenter expressed concern about the 
applicability of the Fair Credit Reporting Act (FCRA) when using non-
documentary methods, such as credit reports.\93\
---------------------------------------------------------------------------

    \91\ As discussed above, non-documentary methods may be used in 
any circumstance.
    \92\ Id.
    \93\ We have determined that there is no statutory basis to 
shield broker-dealers from FCRA requirements with respect to 
requirements under the final rule.
---------------------------------------------------------------------------

    We recognize that there are many scenarios and combinations of risk 
factors that broker-dealers may encounter, and we have decided to adopt 
general principles that are illustrated by examples, in lieu of a 
lengthy and possibly unwieldy regulation that attempts to address a 
wide variety of situations with particularity. Under the final rule, a 
broker-dealer relying on non-documentary verification methods must 
describe them in its CIP.\94\ The final rule includes an illustrative 
list of methods, similar to the list that was included in the proposed 
rule. These methods may include: (1) Contacting a customer; (2) 
independently verifying the customer's identity through the comparison 
of information provided by the customer with information obtained from 
a consumer reporting agency, public database,\95\ or other source; (3) 
checking references with other financial institutions; and (4) 
obtaining a financial statement.\96\ We continue to recommend that 
broker-dealers 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.
---------------------------------------------------------------------------

    \94\ Final rule, paragraph (b)(2)(ii)(B).
    \95\ We do not list the specific types of databases that would 
be suitable for verification. Thus, in response to the one comment, 
the SEC's EDGAR system may be an appropriate means of undertaking 
non-documentary verification. Ultimately, it will depend on the 
circumstances and the broker-dealer's assessment of the relevant 
risk factors.
    \96\ Final rule, paragraph (b)(2)(ii)(B)(1).
---------------------------------------------------------------------------

    The final rule also includes a list, similar to that in the 
proposed rule, of circumstances that may require the use of non-
documentary procedures.\97\ Specifically, non-documentary procedures 
must address circumstances in which: (1) An individual is unable to 
present an unexpired government-issued identification document that 
bears a photograph or similar safeguard; (2) the broker-dealer is not 
familiar with the documents presented; (3) the account is opened 
without obtaining documents; (4) the customer opens the account without 
appearing in person; and (5) the circumstances increase the risk that 
the broker-dealer will be unable to verify the true identity of a 
customer through documents.\98\
---------------------------------------------------------------------------

    \97\ Final rule, paragraph (b)(2)(ii)(B)(2).
    \98\ Id. The final clause acknowledges that there may be 
circumstances, beyond those specifically described in this 
provision, when a broker-dealer should use non-documentary 
verification procedures.
---------------------------------------------------------------------------

    As we stated in the NPRM, because identification documents may be 
obtained illegally and may be fraudulent, and in light of the recent 
increase in identity theft, we encourage broker-dealers to use non-
documentary methods even when the customer has provided identification 
documents.

Section 103.122(b)(2)(ii)(C) Customer Verification--Additional 
Verification for Certain Customers

    As described earlier, we originally proposed to require 
verification of the identity of any person authorized to effect 
transactions in a customer's account. Most commenters objected to this 
requirement, and it does not appear in the final rule. For the reasons 
discussed below, however, the rule does require that a broker-dealer's 
CIP address the circumstances in which it will obtain information about 
such individuals in order to verify a customer's identity.\99\
---------------------------------------------------------------------------

    \99\ See final rule, paragraph (b)(2)(ii)(C).
---------------------------------------------------------------------------

    Treasury and the SEC believe that, while broker-dealers may be able 
to verify the majority of customers adequately through the documentary 
or non-documentary verification methods described above, there may be 
circumstances when these methods are inadequate. The risk that the 
broker-dealer will not know the customer's true identity may be 
heightened for certain types of accounts, such as an account

[[Page 25121]]

opened in the name of a corporation, partnership, or trust that is 
created or conducts substantial business in a jurisdiction that has 
been designated by the United States as a primary money laundering 
concern or has been designated as non-cooperative by an international 
body. We believe that a broker-dealer must identify customers that pose 
a heightened risk of not being properly identified and that a broker-
dealer's CIP must prescribe additional measures that may be used to 
obtain information about the identity of the individuals associated 
with the customer when standard documentary or non-documentary methods 
prove to be insufficient.
    The final rule, therefore, includes a new provision on verification 
procedures. This provision requires that the CIP address circumstances 
in which, based on the broker-dealer's risk assessment of a new account 
opened by a customer that is not an individual, the broker-dealer also 
will obtain information about individuals with authority or control 
over the account, including persons authorized to effect transactions 
in the account, in order to verify the customer's true identity.\100\ 
This additional verification method applies only when the broker-dealer 
cannot adequately verify the customer's true identity using documentary 
and non-documentary verification methods.\101\
---------------------------------------------------------------------------

    \100\ Id.
    \101\ A broker-dealer need not undertake any additional 
verification if it chooses not to open an account when it cannot 
verify the customer's true identity after using standard documentary 
and non-documentary verification methods.
---------------------------------------------------------------------------

Section 103.122(b)(2)(iii) Lack of Verification

    We proposed to require that a broker-dealer's CIP include 
procedures for responding to circumstances in which the firm cannot 
form a reasonable belief that it knows the true identity of the 
customer.\102\ We explained in the NPRM that the CIP should specify the 
actions to be taken, which could include closing the account or placing 
limitations on additional purchases.\103\ We also explained that there 
should be guidelines for when an account will not be opened (e.g., when 
the required information is not provided), and that the CIP should 
address the terms under which a customer may conduct transactions while 
the customer's identity is being verified.\104\
---------------------------------------------------------------------------

    \102\ See NPRM, 67 FR at 48317.
    \103\ See NPRM, Section II.G, 67 FR at 48310.
    \104\ Id.
---------------------------------------------------------------------------

    We did not receive any comments on this aspect of the proposed rule 
and the final rule adopts the provision substantially as proposed.\105\ 
However, it adds a description of recommended features of these 
procedures, based on the features described in the NPRM. Thus, the 
final rule states that the procedures should describe: (1) When the 
broker-dealer should not open an account; (2) the terms under which a 
customer may use an account while the broker-dealer attempts to verify 
the customer's identity; (3) when the broker-dealer should file a 
Suspicious Activity Report (SAR) in accordance with applicable law; and 
(4) when the broker-dealer should close an account, after attempts to 
verify a customer's identity have failed.\106\
---------------------------------------------------------------------------

    \105\ Final rule, paragraph (b)(2)(iii).
    \106\ Id.
---------------------------------------------------------------------------

Section 103.122(b)(3) Recordkeeping

Section 103.122(b)(3)(i) Required Records

    We proposed to require broker-dealer CIPs to include certain 
recordkeeping procedures. \107\ First, the proposed rule would have 
required that a broker-dealer maintain a record of the identifying 
information provided by customers. Second, if a broker-dealer relies on 
a document to verify a customer's identity, the proposed rule would 
have required the firm to maintain a copy of the document. Third, the 
proposed rule would have required broker-dealers to record the methods 
and results of any additional measures undertaken to verify the 
identity of customers. Finally, the proposed rule would have required 
broker-dealers to record the resolution of any discrepancy in the 
identifying information obtained.
---------------------------------------------------------------------------

    \107\ See NPRM, 67 FR at 48317.
---------------------------------------------------------------------------

    Twelve commenters submitted comments on this aspect of the rule. 
Generally they objected to the requirement to maintain copies of 
verification documents or reports of non-documentary methods. They 
argued that this requirement was overly burdensome. Two commenters 
requested that the language in the proposed rule requiring broker-
dealers to make copies that ``accurately depict'' the documentary 
records be harmonized with the CIP rules issued by the other Federal 
functional regulators.
    We have reconsidered and modified the recordkeeping requirements of 
the rule. The final rule provides that a broker-dealer's CIP must 
include procedures for making and maintaining records related to 
verifying customers. However, the final rule is significantly more 
flexible than the proposed rule. Under the final rule, a broker-dealer 
must still make a record of the identifying information obtained about 
each customer.\108\ However, rather than requiring copies of 
verification documents, the final rule requires that a broker-dealer's 
records include a description of any document that the broker-dealer 
relied on to verify the identity of the customer, noting the type of 
document, any identification number contained in the document, the 
place of issuance, and the issuance and expiration dates, if any.\109\ 
With respect to non-documentary verification, the final rule now 
requires the records to include ``a description'' of the methods and 
results of any measures undertaken to verify the identity of the 
customer.\110\ The final rule also requires a record of the resolution 
of any substantive discrepancy discovered when verifying the 
identifying information obtained.\111\
---------------------------------------------------------------------------

    \108\ See final rule, paragraph (b)(3)(i)(A).
    \109\ Final rule, paragraph (b)(3)(i)(B).
    \110\ Final rule, paragraph (b)(3)(i)(C).
    \111\ Final rule, paragraph (b)(3)(i)(D). In response to one of 
the commenters, we limited this requirement to ``substantive'' 
discrepancies to make clear that records would not have to be made 
in the case of minor discrepancies, such as those that might be 
caused by typographical mistakes.
---------------------------------------------------------------------------

    As we stated in the NPRM, nothing in the rule modifies, limits, or 
supersedes Section 101 of the Electronic Signatures in Global and 
National Commerce Act.\112\ A broker-dealer may use electronic records 
to satisfy the requirements of this final rule, in accordance with 
guidance that the Commission has issued.\113\
---------------------------------------------------------------------------

    \112\ Pub. L. 106-229, 114 Stat. 464 (15 U.S.C. 7001).
    \113\ See Commission Guidance to Broker-dealers on the Use of 
Electronic Storage Media Under the Electronic Signatures in Global 
and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 
Exchange Act Release No. 44238 (May 1, 2001), 66 FR 22916 (May 7, 
2001).
---------------------------------------------------------------------------

Section 103.122(b)(3)(ii) Record Retention

    We proposed to require that a broker-dealer retain all required 
records for five years after the account is closed. Three commenters 
expressed concern about this aspect of the proposal, recommending that 
the recordkeeping period be shortened.
    We believe that, by eliminating the requirement that a broker-
dealer retain copies of documents used to verify customer identities, 
the final rule addresses many of the commenters' concerns. Nonetheless, 
while the identifying information provided by customers should be 
retained as proposed, there is little value in requiring broker-dealers 
to retain the remaining records for five years after an account is 
closed, because this information is likely to grow stale. Therefore, 
the final rule prescribes a

[[Page 25122]]

bifurcated record retention schedule that is consistent with a general 
five-year retention requirement.\114\ Under the final rule, the broker-
dealer must retain the information obtained about a customer pursuant 
to paragraph (b)(3)(i)(A) for five years after the date the account is 
closed.\115\ The remaining records required under paragraphs 
(b)(3)(i)(B), (C), and (D) (i.e., information that verifies a 
customer's identity) need only be retained for five years after the 
record is made. The final rule provides that these records otherwise 
shall be maintained in accordance with the provisions of the broker-
dealer recordkeeping rule (Rule 17a-4).\116\
---------------------------------------------------------------------------

    \114\ See Final rule, paragraph (b)(3)(ii).
    \115\ The Secretary has determined that the records required to 
be retained under 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.
    \116\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

Section 103.122(b)(4) Comparison With Government Lists

    We proposed to require that a broker-dealer's CIP have procedures 
for determining whether the customer appears on any list of known or 
suspected terrorists or terrorist organizations prepared by any federal 
government agency and made available to the broker-dealer.\117\ In 
addition, the proposed rule stated that broker-dealers must follow all 
federal directives issued in connection with such lists.
---------------------------------------------------------------------------

    \117\ See NPRM, 67 FR at 48317.
---------------------------------------------------------------------------

    Two commenters recommended that the final rule specify which 
government lists must be checked and provide a mechanism for 
communicating that information to broker-dealers. These commenters also 
suggested that all such lists be consolidated or provided through a 
clearinghouse, such as FinCEN. One commenter suggested that the rule 
should allow for the lists to be checked after an account is opened. 
Another commenter sought clarification that the requirement to check 
these lists only applied to the broker-dealer and not its 
affiliates.\118\
---------------------------------------------------------------------------

    \118\ This rule only applies to ``broker-dealers'' as that term 
is defined in the rule. However, there may be cases where a broker-
dealer's affiliate is subject to a CIP rule issued by Treasury and 
one of the other Federal functional regulators.
---------------------------------------------------------------------------

    The final rule states that a broker-dealer's CIP must include 
procedures for determining whether the customer appears on any list of 
known or suspected terrorists or terrorist organizations issued by any 
federal government agency and designated as such by Treasury in 
consultation with the federal functional regulators.\119\ Because 
Treasury and the federal functional regulators have not yet designated 
any such lists, the final rule cannot be more specific with respect to 
the lists that broker-dealers must check.\120\ However, broker-dealers 
will not have an affirmative duty under this rule to seek out all lists 
of known or suspected terrorists or terrorist organizations compiled by 
the federal government. Instead, they will receive notification by way 
of separate guidance regarding the lists that they must consult for 
purposes of this provision.
---------------------------------------------------------------------------

    \119\ Final rule, paragraph (b)(4).
    \120\ This is not to say, however, that broker-dealers do not 
have obligations under other laws to screen their customers against 
government lists. For example, broker-dealers already should have 
compliance programs in place to ensure they comply with Treasury's 
Office of Foreign Assets Control rules prohibiting transactions with 
certain foreign countries or their nationals. See OFAC's Foreign 
Assets Control Regulations for the Securities Industry, which can be 
viewed at the following Web site: http://www.ustreas.gov/offices/enforcement/ofac/regulations/t11facsc.pdf.
---------------------------------------------------------------------------

    We also have modified this provision to give guidance as to when a 
broker-dealer must consult a list of known or suspected terrorists or 
terrorist organizations. The final rule states that the CIP's 
procedures must require the broker-dealer to determine whether a 
customer appears on a list ``within a reasonable period of time'' after 
the account is opened, or earlier if required by another federal law or 
regulation or by a federal directive issued in connection with the 
applicable list.\121\
    The final rule also requires a broker-dealer's CIP to include 
procedures that require the firm to follow all federal directives 
issued in connection with such lists.\122\ Again, because no lists have 
yet been designated under this provision, the final rule cannot provide 
more guidance in this area.
---------------------------------------------------------------------------

    \121\ Final rule, paragraph (b)(4).
    \122\ Id.
---------------------------------------------------------------------------

Section 103.122(b)(5) Customer Notice

    We proposed to require that a broker-dealer's CIP include 
procedures for providing customers with adequate notice that the firm 
is requesting information to verify their identities.\123\ The NPRM 
stated that a broker-dealer could satisfy that notice requirement by 
generally notifying its customers about the firm's verification 
procedures.\124\ It stated that if an account is opened electronically, 
such as through an Internet Web site, the broker-dealer could provide 
notice electronically.\125\
---------------------------------------------------------------------------

    \123\ See NPRM, 67 FR at 48317.
    \124\ NPRM, Section II.F, 67 FR at 48310.
    \125\ Id.
---------------------------------------------------------------------------

    Four commenters requested model language for the notice. Two 
commenters suggested that the rule allow notice to be given within a 
reasonable time after the account is opened.
    Section 326 of the Act provides that the regulations issued ``shall 
at a minimum, require financial institutions to * * * [give] customers 
* * * adequate notice'' of the procedures they adopt concerning 
customer identification. Based on this statutory requirement, the final 
rule requires a broker-dealer's CIP to include procedures for providing 
customers with adequate notice that the firm is requesting information 
to verify their identities. The final rule provides additional guidance 
regarding what constitutes adequate notice and the timing of the notice 
requirement. The final rule states that notice is adequate if the 
broker-dealer generally describes the identification requirements of 
the final rule and provides notice in a manner reasonably designed to 
ensure that a customer views the notice before opening an account.\126\ 
The final rule states that, depending on how an account is opened, a 
broker-dealer may post a notice in the lobby or on its website, or use 
any other form of oral or written notice, such as a statement on an 
account application.\127\ In addition, the final rule includes sample 
language that, if appropriate, will be deemed adequate notice to a 
broker-dealer's customers when provided in accordance with the 
requirements of the final rule.\128\
---------------------------------------------------------------------------

    \126\ Final rule, paragraph (b)(5)(ii).
    \127\ Id.
    \128\ Final rule, paragraph (b)(5)(iii).
---------------------------------------------------------------------------

Section 103.122(b)(6) Reliance on Other Financial Institutions

    In the proposed rule, we included as a risk factor a broker-
dealer's reliance on another broker-dealer.\129\ In the NPRM, we stated 
that this 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.\130\ We stated that 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).\131\
---------------------------------------------------------------------------

    \129\ See NPRM, 67 FR at 48317.
    \130\ NPRM, Section II.B, 67 FR at 48307-48308.
    \131\ Id.
---------------------------------------------------------------------------

    Six commenters submitted a variety of comments on this aspect of 
the proposed rule and the NPRM. Generally,

[[Page 25123]]

they all supported expanding the reliance provision beyond the confines 
of a clearing/introducing broker-dealer relationship. Some suggested 
allowing reliance in other broker-dealer relationships, such as that 
between a prime broker and an executing broker. Some also suggested 
permitting broker-dealers to rely on other types of entities, such as 
other financial institutions or affiliates. Two commenters also 
expressed concern with the degree of liability that remained with a 
broker-dealer relying on another broker-dealer.
    We recognize that there may be circumstances in which a broker-
dealer should be able to rely on the performance by another financial 
institution of some or all of the elements of the firm's CIP.\132\ 
Therefore, the final rule provides that a broker-dealer's CIP may 
include procedures that specify when the broker-dealer will rely on the 
performance by another financial institution (including an affiliate) 
of any procedures of the firm's CIP, and thereby satisfy the broker-
dealer's obligations under the rule.\133\ Reliance is permitted if a 
customer of the broker-dealer is opening, or has opened, an account or 
has established a similar relationship with the other financial 
institution to provide or engage in services, dealings, or other 
financial transactions.
---------------------------------------------------------------------------

    \132\ This provision of the rule does not affect the ability of 
a broker-dealer to contractually delegate the implementation and 
operation of its CIP to a service provider that would not qualify 
under the reliance provisions of paragraph (b)(6). However, in such 
a case, the broker-dealer remains solely responsible for assuring 
compliance with the rule, and therefore must actively monitor the 
operation of its CIP and assess its effectiveness.
    \133\ Final rule, paragraph (b)(6).
---------------------------------------------------------------------------

    In order for a broker-dealer to rely on the other financial 
institution, (1) such reliance must be reasonable under the 
circumstances, (2) the other financial institution must be subject to a 
rule implementing the anti-money laundering compliance program 
requirements of 31 U.S.C. 5318(h) and be regulated by a federal 
functional regulator, and (3) the other financial institution must 
enter into a contract with the broker-dealer requiring it to certify 
annually to the broker-dealer that it has implemented an anti-money 
laundering program and will perform (or its agent will perform) the 
specified requirements of the broker-dealer's CIP. The contract and 
certification will provide a standard means for a broker-dealer to 
demonstrate the extent to which it is relying on another financial 
institution to perform its CIP, and that the other institution has, in 
fact, agreed to perform those functions.\134\ If it is not clear from 
these documents, a broker-dealer must be able to otherwise demonstrate 
when it is relying on another financial institution to perform its CIP 
with respect to a particular customer. The broker-dealer will not be 
held responsible for the failure of the other financial institution to 
fulfill adequately the broker-dealer's CIP responsibilities, provided 
that the broker-dealer can establish that its reliance was reasonable 
and that it has obtained the requisite contracts and certifications. 
Treasury and the SEC emphasize that the broker-dealer and the other 
financial institution upon which it relies must satisfy all of the 
conditions set forth in this final rule. If they do not, then the 
broker-dealer remains solely responsible for applying its own CIP to 
each customer in accordance with this rule.
---------------------------------------------------------------------------

    \134\ A broker-dealer must be able to demonstrate that the other 
financial institution has agreed to perform the relevant 
requirements of the broker-dealer's CIP, regardless of whether the 
other financial institution is an affiliate or a non-affiliate. 
Accordingly, the contract and certification requirement in the final 
rule applies equally to affiliate and non-affiliate reliance.
---------------------------------------------------------------------------

    All of the federal functional regulators are adopting comparable 
provisions in their CIP rules to permit such reliance. Furthermore, the 
federal functional regulators expect to share information and cooperate 
with each other to determine whether the institutions subject to their 
jurisdiction are in compliance with the reliance provision of this 
rule.

Section 103.122(c) Exemptions

    The proposed rule provided 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.\135\ 
However, it excluded 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 provided 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).
---------------------------------------------------------------------------

    \135\ See NPRM, 67 FR at 48317.
---------------------------------------------------------------------------

    We received no comments on this provision in the proposed rule and 
are adopting it substantially as proposed.\136\
---------------------------------------------------------------------------

    \136\ Final rule, paragraph (c). The reference to firms that 
register under 15 U.S.C. 78o(b)(11) has been removed since these 
firms are excluded from the rule's definition of broker-dealer.
---------------------------------------------------------------------------

Section 103.122(d) Other Requirements Unaffected

    The final rule includes a provision, parallel to that in CIP rules 
adopted by the other Federal functional regulators, to the effect that 
nothing in the rule shall be construed to relieve a broker-dealer of 
its obligations to obtain, verify, or maintain information that is 
required by another regulation in Part 103.\137\ In addition, broker-
dealers continue to be subject to existing securities law requirements, 
which may have different or more rigorous requirements than those in 
the final rule.\138\
---------------------------------------------------------------------------

    \137\ Final rule, paragraph (d).
    \138\ For example, Rule 17a-3(a)(9) requires broker-dealers to 
obtain the name and address of the beneficial owners of certain 
accounts and NASD Rule 3110, among other things, requires broker-
dealers to obtain the names of persons authorized to transact 
business on behalf of customers that are legal entities.
---------------------------------------------------------------------------

B. Requirement for CIP Approval Removed

    The proposed rule had a requirement in paragraph (i) that the CIP 
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.\139\ The final rule requires the CIP to be a 
part of the overall AML programs required of broker-dealers under NASD 
Rule 3011 and NYSE Rule 445.\140\ NASD Rule 3011 and NYSE Rule 445 
require the AML programs to be approved in writing by a member of the 
broker-dealer's senior management. We removed the approval requirement 
in the final rule because it was unnecessary given the approval 
requirements in NASD Rule 3011 and NYSE Rule 445. We note, however, 
that a broker-dealer with an AML program that has been approved as 
required, must nonetheless obtain approval of a new CIP because it 
would be a material change to the AML program.
---------------------------------------------------------------------------

    \139\ See NPRM, 67 FR at 48317.
    \140\ See final rule, paragraph (b)(1).
---------------------------------------------------------------------------

III. Conforming Amendments to 31 CFR 103.35

    As Treasury explained in the NPRM, current section 103.35(a) sets 
forth customer identification requirements when certain brokerage 
accounts are opened. Together with the proposed rule implementing 
section 326 of the Act, Treasury, on its own authority, proposed 
deleting 31 CFR 103.35(a) for the following reasons.
    Generally, sections 103.35(a)(1) and (2) require a broker-dealer, 
within 30

[[Page 25124]]

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. These requirements conflicted with those 
in the proposed CIP rule, which required broker-dealers to obtain the 
name, address, date of birth and an identification number from any 
person opening a new account.
    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 \141\ opening accounts. The proposed rule did not 
exempt any persons from the CIP requirements. As stated in the NPRM, 
Treasury believes that the requirements of section 103.35(a) are 
inconsistent with the intent and purpose of section 326 of the Act and 
incompatible with the proposed rule.
---------------------------------------------------------------------------

    \141\ 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.
---------------------------------------------------------------------------

    For these reasons, Treasury, under its own authority, proposed 
deleting the above referenced provisions in 103.35(a). Treasury and the 
Commission requested 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. The comments we received requesting exemptions from the CIP 
requirements have been discussed above in the section-by-section 
analysis of the final rule.
    Treasury has determined that given the more comprehensive 
requirements of the final CIP rule, there is no longer a need for Sec.  
103.35 (a). A number of the exemptions formerly in Sec.  103.35(a) have 
now been added to the final CIP rule. Other exemptions conflict with 
the language and intent of section 326 of the Act and thus are not 
adopted in the final rule. While 103.35(a) will no longer be needed 
once the final rule is fully effective, withdrawing the provision 
before October 1, 2003, would create a gap period during which broker-
dealers would not be subject to a rule under the BSA requiring 
customers to be identified when opening brokerage accounts. Because 
Treasury and the Commission do not believe such a gap period would be 
appropriate, the final rule--rather than withdrawing 103.35(a)--amends 
the section to cut off its applicability on October 1, 2003, when 
103.122 becomes fully effective.

IV. Paperwork Reduction Act

    The new rule has certain provisions that contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.). Treasury submitted the 
proposed rule to the Office of Management and Budget (``OMB'') for 
review in accordance with 44 U.S.C 3507(d) and 5 CFR 1320.11. 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. The OMB has approved the collection of information 
requirements in today's rule under control number 1506-0034.

A. Collection of Information Under the Proposed Rule

    The final rule contains recordkeeping and disclosure requirements 
that are subject to the Paperwork Reduction Act of 1995. In summary, 
the final rule, like 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 CIP procedures to customers. These recordkeeping and notice 
requirements are required under section 326 of the Act. However, the 
final rule reduces the paperwork burden attributable to these 
requirements, as described below.

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 final rule, 
Treasury and the Commission are seeking to fulfill their statutorily 
mandated responsibilities under section 326 and to achieve its 
important purpose.
    The final 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 final 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, and the identification number of the 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 final rule also requires each broker-dealer to give customers 
``adequate notice'' of the identity verification procedures. Depending 
on how an account is opened, 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.

[[Page 25125]]

C. Respondents

    The final rule will apply to approximately 5,448 broker-dealers, 
which is the approximate number of firms that conduct business with the 
general public.\142\
---------------------------------------------------------------------------

    \142\ This figure is derived from financial information filed by 
broker-dealers on Form X-17a-5--Financial and Operational Combined 
Uniform Single (FOCUS) Reports--pursuant to section 17 of the 
Exchange Act and rule 17a-5 (17 CFR 240.17a-5).
---------------------------------------------------------------------------

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 5,448 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 10,896 
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.\143\ Therefore, in 
complying with this requirement, the Commission estimates that the 
industry as a whole will spend approximately 140,833 hours in 2003, 
620,000 hours in 2004 and 683,833 hours in 2005.\144\
---------------------------------------------------------------------------

    \143\ The Commission estimates that the number of new accounts 
per year will be: 16,900,000 in 2003, 18,600,000 in 2004, and 
20,515,000 in 2005. 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 their FOCUS Reports; 
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 16,900,000 new accounts will 
be added in 2003, 18,600,000 in 2004 and 20,515,000 in 2005.
    \144\ 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. The final rule will 
be effective only for the last quarter of 2003. Therefore, while the 
total burden for a twelve-month effective period would be 563,333 
hours, the actual burden being allocated to the rule is 140,833 (or 
\1/4\ of 563,333).
---------------------------------------------------------------------------

    We believe that there is a nominal burden associated with the new 
recordkeeping requirement. Under the final rule, a broker-dealer may 
rely on another financial institution to perform some or all its CIP 
under certain conditions, including that the financial institution must 
enter into a contract requiring the financial institution to certify 
annually to the broker-dealer that it has implemented its anti-money 
laundering program and that it will perform (or its agent will perform) 
the specified elements of the broker-dealer's CIP. Not all broker-
dealers will choose to rely on a third party. The minimal burden of 
retaining the certification described above should allow a broker-
dealer to reduce its net burden under the rule by relying on another 
financial institution to perform some or all of its CIP.
3. Request for Comment
    Treasury and the Commission invite comments on the accuracy of the 
burden estimates and suggestions on how to further reduce these 
burdens. Comments 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 (1506-0034), 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.

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 final rule requires that the documentation of the identifying 
information obtained from the customer be retained until five years 
after the date the account of the customer is closed and that the other 
records relating to the verification of the customer be retained until 
five years after the record is made.

V. SEC's Analysis of the Costs and Benefits Associated With the Final 
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 final 
rule implements this statutory mandate by requiring broker-dealers to 
(1) establish a CIP; (2) obtain certain identifying information from 
customers; (3) verify the identifying information; (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 final 
rule specifies certain minimum requirements, broker-dealers are 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 
final rule are attributable to the statute, it considered preliminarily 
the costs and benefits associated with the proposed rule and requested 
comment on all aspects of its cost-benefit analysis.\145\ The 
Commission sought comment on all aspects of the rule, including whether 
the establishment of 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 sought comment on 
whether the costs are attributable to the statute. Most commenters did 
not address the Commission's cost-benefits

[[Page 25126]]

analysis. The commenters that did discuss costs stated generally that 
they believed the Commission had underestimated them.
---------------------------------------------------------------------------

    \145\ NPRM, Section VI, 67 FR at 48313.
---------------------------------------------------------------------------

    In light of the comments, the Commission re-examined its analysis, 
obtained further cost information and adjusted its cost estimate with 
respect to the one-time costs associated with implementing a CIP. The 
adjustment is reflected in the cost section below titled ``Implementing 
the CIP.'' The Commission also adjusted certain of the burden totals to 
reflect updated figures (e.g., number broker-dealers doing a public 
business) obtained from more recent broker-dealer FOCUS reports. As 
discussed throughout this release, the burdens that would have been 
imposed by the proposed rule have been lessened as a result of changes 
to the final rule including (1) the narrowing of the definitions of 
``account'' and ``customer,'' (2) the elimination of need to make and 
retain certain records, and (3) the expansion of the reliance 
provision. The estimates below take these changes into account.

A. Benefits Associated With the Final 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 final 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 Final Rule

1. Implementing a CIP
    Most broker-dealers, as a matter of prudent business practices, 
already should 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.\146\ Similarly, the self-regulatory 
organizations have rules requiring broker-dealers to obtain identifying 
information from customers.\147\ Accordingly, firms should have written 
procedures for complying with these existing regulations.
---------------------------------------------------------------------------

    \146\ 17 CFR 240.17a-3(a)(9).
    \147\ 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 
costs low by allowing for great flexibility in establishing a CIP. For 
example, the CIP should 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 draft CIP procedures 
to be approximately $2,244, resulting in a one time overall cost to the 
industry of approximately $12,225,312.\148\
---------------------------------------------------------------------------

    \148\ The Commission estimates that it will take broker-dealers 
on average approximately 20 hours to draft a 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 
September 30, 2002, there were approximately 5,448 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 5,448 or $12,225,312.
---------------------------------------------------------------------------

    Previously, the Commission included, as part of the costs of 
establishing a CIP, a cost estimate associated with updating account 
opening applications or account opening websites. This was estimated as 
a one-time cost to the industry of $563,760.\149\ Several commenters 
stated that they believed the Commission had underestimated the burden 
of establishing a CIP. One commenter also identified steps that would 
need to be taken in addition to updating applications and websites. 
Accordingly, the Commission is now adjusting its estimate of the costs 
associated with revising or designing forms and other documentation 
(including applications and Web sites), and including costs associated 
with programming and testing automated systems. The Commission 
estimates the one-time costs associated with modifying account 
application materials to be $8,274,150.\150\ Further, the Commission 
estimates the one-time costs associated with programming and testing 
automated systems to be $25,505,536.\151\
---------------------------------------------------------------------------

    \149\ The Commission estimated that it would take each broker-
dealer, on average, one hour to update account opening applications 
or electronic account opening systems. The Commission believed 
broker-dealers would 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 was estimated to be: 
($101.25) x (the number of broker-dealers doing a public business or 
5,568) or $563,760.
    \150\ The Commission estimates that it will take each broker-
dealer, on average, fifteen hours to modify account opening 
documentation or electronic account opening systems. The Commission 
believes 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 was estimated to be: 
($101.25) x (15 hours) x (the number of broker-dealers doing a 
public business--5,448) or $8,274,150.
    \151\ The Commission estimates that it will take broker-dealers 
on average approximately 640 hours to program and test the automated 
systems that will need to be changed to comply with the rule. The 
Commission estimates computer programmers will do this work. The 
hourly cost of a computer programmer is $66.20 (SIA Earnings Report, 
Table 158 (Senior Programmer)). The Commission estimates that 
generally systems changes will need to be made only by broker-
dealers that carry or clear customer accounts. FOCUS report data 
indicates that there are approximately 602 such broker-dealers. 
Accordingly, the total cost to the industry is estimated to be 
($66.20) x (640 hours) x (602 broker-dealers) or $25,505,536.
---------------------------------------------------------------------------

2. Obtaining Identifying Information
    The Commission believes that broker-dealers already obtain from 
customers most, if not all, of the information required under the final 
rule.\152\ Rule

[[Page 25127]]

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.\153\
---------------------------------------------------------------------------

    \152\ 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.
    \153\ 17 CFR 240.17a-3(a)(9).
---------------------------------------------------------------------------

    Further, broker-dealers are already required, pursuant to NASD Rule 
3110, to obtain certain identifying information with respect to each 
account.\154\ For example, if the customer is a natural person, the 
rule requires the broker-dealer to obtain the customer's name and 
address.\155\ 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.\156\ 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.\157\ If the account is a 
discretionary account, the broker-dealer must obtain the signature of 
each person authorized to exercise discretion over the account.\158\ 
Finally, the broker-dealer must maintain all of this information as a 
record of the firm.
---------------------------------------------------------------------------

    \154\ 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.
    \155\ NASD Rule 3110(c)(1).
    \156\ NASD Rule 3110(c)(2).
    \157\ NASD Rule 3110(c)(1).
    \158\ NASD Rule 3110(c)(3).
---------------------------------------------------------------------------

    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.'' \159\
    While broker-dealers currently are required 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 
$1,598,458 in 2003, $7,037,000 in 2004 and $7,761,508 in 2005.\160\
---------------------------------------------------------------------------

    \159\ NYSE Rule 405(1).
    \160\ 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: 16,900,000 in 2003, 18,600,000 in 
2004 and 20,515,000 in 2005. The final rule will be effective only 
for the last quarter of 2003. Therefore, while the total cost for a 
twelve-month effective period would be $6,393,833, the actual cost 
being allocated to the rule for 2003 is $1,598,458 (or \1/4\ of 
$6,393,833).
---------------------------------------------------------------------------

3. Verifying Identifying Information
    The final rule gives broker-dealers substantial flexibility in 
establishing how they will independently verify the information 
obtained from customers. For example, customers that open accounts on a 
broker-dealer's premises can 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 opening 
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 for a given firm to form a reasonable belief that it knows the 
true identities of its customers.
    The Commission estimates identity verification 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 $13,343,958 
in 2003, $58,745,000 in 2004 and $64,793,208 in 2005.\161\
---------------------------------------------------------------------------

    \161\ 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: 16,900,000 in 2003, 18,600,000 in 
2004 and 20,515,000. The final rule will be effective only for the 
last quarter of 2003. Therefore, while the total cost for a twelve-
month effective period would be $53,375,833, the actual cost being 
allocated to the rule for 2003 is $13,343,958 (or \1/4\ of 
$53,375,833).
---------------------------------------------------------------------------

4. Determining Whether Customers Appear on a Federal Government List
    The Commission believes that broker-dealers that 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

[[Page 25128]]

that the total cost to the industry to check such lists will be 
$911,896 in 2003, $4,014,500 in 2004 and $4,427,820 in 2005.\162\
---------------------------------------------------------------------------

    \162\ 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: 16,900,000 in 2003, 
18,600,000 in 2004 and 20,515,000 in 2005. The final rule will be 
effective only for the last quarter of 2003. Therefore, while the 
total cost for a twelve-month effective period would be $3,647,583, 
the actual cost being allocated to the rule for 2003 is $911,896 (or 
\1/4\ of $3,647,583).
---------------------------------------------------------------------------

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. Depending on how accounts are 
opened, 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 implement adequate 
notices will be $1,401,498.\163\
---------------------------------------------------------------------------

    \163\ 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 5,448) or $1,401,498.
---------------------------------------------------------------------------

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. Moreover, 
the final rule has modified the recordkeeping requirements to make them 
less burdensome. 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 $3,647,583 in 2003, $16,058,000 in 2004 and $17,711,283 
in 2005.\164\
---------------------------------------------------------------------------

    \164\ 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 and 
that the requirements in the final rule have been modified. 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: 16,900,000 in 2003, 18,600,000 in 2004 and 20,515,000 in 2005. 
The final rule will be effective only for the last quarter of 2003. 
Therefore, while the total cost for a twelve-month effective period 
would be $14,590,333, the actual cost being allocated to the rule 
for 2003 is $3,647,583 (or \1/4\ of $14,590,333).
---------------------------------------------------------------------------

VI. 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 the NPRM, Treasury 
and the Commission stated that the proposed rule likely would not have 
a ``significant economic impact on a substantial number of small 
entities.'' \165\ 5 U.S.C. 605(b). First, we noted that 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, we pointed out that the economic impact on broker-dealers, 
including small entities, is imposed by the statute itself, and not by 
the final rule.
---------------------------------------------------------------------------

    \165\ NPRM, Section VII, 67 FR at 48315.
---------------------------------------------------------------------------

    While Treasury and the Commission believed that the proposed rule 
likely would not have a significant economic impact on a substantial 
number of small entities, Treasury and the Commission prepared an 
Initial Regulatory Flexibility Analysis (IRFA) that was published in 
the NPRM. Therefore, a Final Regulatory Flexibility Analysis (FRFA) has 
been prepared in accordance with 5 U.S.C. 604.

A. Need for and Objectives of the Rule

    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 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 rule seeks to achieve the goals of section 326 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.

B. Significant Issues Raised by Public Comment

    In the NPRM, Treasury and the Commission specifically requested 
public comments on any aspect of the IRFA, as well as the number of 
small entities that may be affected by the proposed rule. The agencies 
received no comments on the IRFA.

C. Small Entities Subject to the Rule

    The final rule will affect broker-dealers that are small entities. 
Rule 0-

[[Page 25129]]

10 under the Exchange Act \166\ 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.
---------------------------------------------------------------------------

    \166\ 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    The Commission estimates there are approximately 878 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.

D. 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.
    As noted above, the rule is not expected to have a significant 
economic impact on a substantial number of small entities. Commission 
staff estimates that broker-dealers needing to draft a CIP will spend, 
on average, approximately 20 hours, at a cost of approximately $2,244 
per firm, and that broker-dealers needing to make systems modifications 
will spend, on average, approximately 640 hours at a cost of $39,864.44 
per firm.
    Although small entities will also incur annual costs, the 
Commission expects that they will not have a significant economic 
impact. For each new account, a broker-dealer will require what we 
estimate to be one minute for collecting customer information, 5 
minutes for verifying customer information, half a minute for 
comparison to government lists, and 2 minutes for record retention, 
each at a cost of approximately $22 to $26 per hour. Small entities are 
likely to have a relatively small number of accounts; therefore, they 
will incur the ongoing costs of individual customer identifications 
relatively infrequently.

E. Agency Action To Minimize Effect on Small Entities

    Treasury and the Commission considered significant alternatives to 
the amendments that would accomplish the stated objective, while 
minimizing any significant 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 for small broker-dealers from coverage 
of the proposed amendments or any part thereof.
    The final 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 
indicated above. Treasury and the Commission believe that the 
alternative approaches to minimize the adverse impact of the rule on 
small entities are not consistent with the statutory mandate of section 
326. In addition, Treasury and the Commission do not believe that 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.

VII. 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 final rule parallels the requirements of section 
326 of the Act. Accordingly, a regulatory impact analysis is not 
required.

List 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.

Department of the Treasury

31 CFR Chapter I

Authority and Issuance

0
For the reasons set forth in the preamble, part 103 of title 31 of the 
Code of Federal Regulations is amended as follows:

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

0
1. The authority citation for part 103 continues to read as follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, secs. 312, 313, 314, 319, 326, 352, Pub. 
L. 107-56, 115 Stat. 307, 12 U.S.C. 1818, 12 U.S.C. 1786(q).

Sec.  103.35  [Amended]

0
2. In Sec.  103.35, amend the first sentence of paragraph (a)(1) to add 
the words ``and before October 1, 2003'' after the words ``June 30, 
1972''.

0
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)(i) Account means a formal relationship with a broker-dealer 
established to effect transactions in securities, including, but not 
limited to, the purchase or sale of securities and securities loaned 
and borrowed activity, and to hold securities or other assets for 
safekeeping or as collateral.
    (ii) Account does not include:
    (A) An account that the broker-dealer acquires through any 
acquisition, merger, purchase of assets, or assumption of liabilities; 
or
    (B) An account opened for the purpose of participating in an 
employee benefit plan established under the Employee Retirement Income 
Security Act of 1974.
    (2) Broker-dealer means a 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)(i) Customer means: (A) A person that opens a new account; and 
(B) an individual who opens a new account for: (1) An individual who 
lacks legal capacity; or (2) an entity that is not a legal person.

[[Page 25130]]

    (ii) Customer does not include: (A) A financial institution 
regulated by a Federal functional regulator or a bank regulated by a 
state bank regulator; (B) a person described in Sec.  103.22(d)(2)(ii) 
through (iv); or (C) a person that has an existing account with the 
broker-dealer, provided the broker-dealer has a reasonable belief that 
it knows the true identity of the person.
    (5) Federal functional regulator is defined at Sec.  103.120(a)(2).
    (6) Financial institution is defined at 31 U.S.C. 5312(a)(2) and 
(c)(1).
    (7) Taxpayer identification number is defined by section 6109 of 
the Internal Revenue Code of 1986 (26 U.S.C. 6109) and the Internal 
Revenue Service regulations implementing that section (e.g., social 
security number or employer identification number).
    (8) U.S. person means: (i) A United States citizen; or (ii) a 
person other than an individual (such as a corporation, partnership or 
trust) that is established or organized under the laws of a State or 
the United States.
    (9) Non-U.S. person means a person that is not a U.S. person.
    (b) Customer identification program: minimum requirements.
    (1) In general. A broker-dealer must establish, document, and 
maintain a written Customer Identification Program (``CIP'') 
appropriate for its size and business that, at a minimum, includes each 
of the requirements of paragraphs (b)(1) through (b)(5) of this 
section. The CIP must be a part of the broker-dealer's anti-money 
laundering compliance program required under 31 U.S.C. 5318(h).
    (2) Identity verification procedures. The CIP must include risk-
based procedures for verifying the identity of each customer to the 
extent reasonable and practicable. The procedures must enable the 
broker-dealer to form a reasonable belief that it knows the true 
identity of each customer. The procedures must be based on the broker-
dealer's assessment of the relevant risks, including those presented by 
the various types of accounts maintained by the broker-dealer, the 
various methods of opening accounts provided by the broker-dealer, the 
various types of identifying information available and the broker-
dealer's size, location and customer base. At a minimum, these 
procedures must contain the elements described in this paragraph 
(b)(2).
    (i)(A) Customer information required. The CIP must contain 
procedures for opening an account that specify identifying information 
that will be obtained from each customer. Except as permitted by 
paragraph (b)(2)(i)(B) of this section, the broker-dealer must obtain, 
at a minimum, the following information prior to opening an account:
    (1) Name;
    (2) Date of birth, for an individual;
    (3) Address, which shall be: (i) For an individual, a residential 
or business street address; (ii) for an individual who does not have a 
residential or business street address, an Army Post Office (APO) or 
Fleet Post Office (FPO) box number, or the residential or business 
street address of a next of kin or another contact individual; or (iii) 
for a person other than an individual (such as a corporation, 
partnership or trust), a principal place of business, local office or 
other physical location; and
    (4) Identification number, which shall be: (i) For a U.S. person, a 
taxpayer identification number; or (ii) for a non-U.S. person, one or 
more of the following: a taxpayer identification number, a 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.

Note to paragraph (b)(2)(i)(A)(4)(ii):
When opening an account for a foreign business or enterprise that 
does not have an identification number, the broker-dealer must 
request alternative government-issued documentation certifying the 
existence of the business or enterprise.

    (B) Exception for persons applying for a taxpayer identification 
number. Instead of obtaining a taxpayer identification number from a 
customer prior to opening an account, the CIP may include procedures 
for opening an account for a customer that has applied for, but has not 
received, a taxpayer identification number. In this case, the CIP must 
include procedures to confirm that the application was filed before the 
customer opens the account and to obtain the taxpayer identification 
number within a reasonable period of time after the account is opened.
    (ii) Customer verification. The CIP must contain procedures for 
verifying the identity of each customer, using information obtained in 
accordance with paragraph (b)(2)(i) of this section, within a 
reasonable time before or after the customer's account is opened. The 
procedures must describe when the broker-dealer will use documents, 
non-documentary methods, or a combination of both methods, as described 
in this paragraph (b)(2)(ii).
    (A) Verification through documents. For a broker-dealer relying on 
documents, the CIP must contain procedures that set forth the documents 
the broker-dealer will use. These documents may include:
    (1) For an individual, an unexpired government-issued 
identification evidencing nationality or residence and bearing a 
photograph or similar safeguard, such as a driver's license or 
passport; and
    (2) For a person other than an individual (such as a corporation, 
partnership or trust), documents showing the existence of the entity, 
such as certified articles of incorporation, a government-issued 
business license, a partnership agreement, or a trust instrument.
    (B) Verification through non-documentary methods. For a broker-
dealer relying on non-documentary methods, the CIP must contain 
procedures that set forth the non-documentary methods the broker-dealer 
will use.
    (1) These methods may include contacting a customer; independently 
verifying the customer's identity through the comparison of information 
provided by the customer with information obtained from a consumer 
reporting agency, public database, or other source; checking references 
with other financial institutions; or obtaining a financial statement.
    (2) The broker-dealer's non-documentary procedures must address 
situations where an individual is unable to present an unexpired 
government-issued identification document that bears a photograph or 
similar safeguard; the broker-dealer is not familiar with the documents 
presented; the account is opened without obtaining documents; the 
customer opens the account without appearing in person at the broker-
dealer; and where 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.
    (C) Additional verification for certain customers. The CIP must 
address situations where, based on the broker-dealer's risk assessment 
of a new account opened by a customer that is not an individual, the 
broker-dealer will obtain information about individuals with authority 
or control over such account. This verification method applies only 
when the broker-dealer cannot verify the customer's true identity using 
the verification methods described in paragraphs (b)(2)(ii)(A) and (B) 
of this section.
    (iii) Lack of verification. The CIP must include procedures for 
responding to circumstances in which the broker-dealer cannot form a 
reasonable belief that it knows the true identity of a

[[Page 25131]]

customer. These procedures should describe:
    (A) When the broker-dealer should not open an account;
    (B) The terms under which a customer may conduct transactions while 
the broker-dealer attempts to verify the customer's identity;
    (C) When the broker-dealer should close an account after attempts 
to verify a customer's identity fail; and
    (D) When the broker-dealer should file a Suspicious Activity Report 
in accordance with applicable law and regulation.
    (3) Recordkeeping. The CIP must include procedures for making and 
maintaining a record of all information obtained under procedures 
implementing paragraph (b) of this section.
    (i) Required records. At a minimum, the record must include:
    (A) All identifying information about a customer obtained under 
paragraph (b)(2)(i) of this section,
    (B) A description of any document that was relied on under 
paragraph (b)(2)(ii)(A) of this section noting the type of document, 
any identification number contained in the document, the place of 
issuance, and if any, the date of issuance and expiration date;
    (C) A description of the methods and the results of any measures 
undertaken to verify the identity of a customer under paragraphs 
(b)(2)(ii)(B) and (C) of this section; and
    (D) A description of the resolution of each substantive discrepancy 
discovered when verifying the identifying information obtained.
    (ii) Retention of records. The broker-dealer must retain the 
records made under paragraph (b)(3)(i)(A) of this section for five 
years after the account is closed and the records made under paragraphs 
(b)(3)(i)(B), (C) and (D) of this section for five years after the 
record is made. In all other respects, the records must be maintained 
pursuant to the provisions of 17 CFR 240.17a-4.
    (4) Comparison with government lists. The CIP must include 
procedures for determining whether a customer appears on any list of 
known or suspected terrorists or terrorist organizations issued by any 
Federal government agency and designated as such by Treasury in 
consultation with the Federal functional regulators. The procedures 
must require the broker-dealer to make such a determination within a 
reasonable period of time after the account is opened, or earlier if 
required by another Federal law or regulation or Federal directive 
issued in connection with the applicable list. The procedures also must 
require the broker-dealer to follow all Federal directives issued in 
connection with such lists.
    (5)(i) Customer notice. The CIP must include procedures for 
providing customers with adequate notice that the broker-dealer is 
requesting information to verify their identities.
    (ii) Adequate notice. Notice is adequate if the broker-dealer 
generally describes the identification requirements of this section and 
provides such notice in a manner reasonably designed to ensure that a 
customer is able to view the notice, or is otherwise given notice, 
before opening an account. For example, depending upon the manner in 
which the account is opened, a broker-dealer may post a notice in the 
lobby or on its Web site, include the notice on its account 
applications or use any other form of oral or written notice.
    (iii) Sample notice. If appropriate, a broker-dealer may use the 
following sample language to provide notice to its customers:

Important Information About Procedures for Opening a New Account

    To help the government fight the funding of terrorism and money 
laundering activities, Federal law requires all financial 
institutions to obtain, verify, and record information that 
identifies each person who opens an account.
    What this means for you: When you open an account, we will ask 
for your name, address, date of birth and other information that 
will allow us to identify you. We may also ask to see your driver's 
license or other identifying documents.

    (6) Reliance on another financial institution. The CIP may include 
procedures specifying when the broker-dealer will rely on the 
performance by another financial institution (including an affiliate) 
of any procedures of the broker-dealer's CIP, with respect to any 
customer of the broker-dealer that is opening an account or has 
established an account or similar business relationship with the other 
financial institution to provide or engage in services, dealings, or 
other financial transactions, provided that:
    (i) Such reliance is reasonable under the circumstances;
    (ii) The other financial institution is subject to a rule 
implementing 31 U.S.C. 5318(h), and regulated by a Federal functional 
regulator; and
    (iii) The other financial institution enters into a contract 
requiring it to certify annually to the broker-dealer that it has 
implemented its anti-money laundering program, and that it will perform 
(or its agent will perform) specified requirements of the broker-
dealer's CIP.
    (c) 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 or 15 U.S.C. 
78o-4 or any 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.
    (d) Other requirements unaffected. Nothing in this section relieves 
a broker-dealer of its obligation to comply with any other provision of 
this part, including provisions concerning information that must be 
obtained, verified, or maintained in connection with any account or 
transaction.

    Dated: April 28, 2003.

    By the Financial Crimes Enforcement Network.
James F. Sloan,
Director.
    Dated: April 29, 2003.

    In concurrence: By the Securities and Exchange Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11017 Filed 5-8-03; 8:45 am]
BILLING CODE 4810-02-P; 8010-01-P