[Federal Register Volume 70, Number 128 (Wednesday, July 6, 2005)]
[Notices]
[Pages 38994-38997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3539]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51934; File No. SR-NYSE-2005-36]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Amend Rule 445

June 29, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is 
hereby given that on May 23, 2005, the New York Stock Exchange, Inc. 
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or the ``Commission'') the proposed rule changes as 
described in Items I, II, and III below, which items have been prepared 
by the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule changes from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Changes

    The Exchange proposes to amend Rule 445 (``Anti-Money Laundering 
Compliance Program'') to establish: (1) Timeframes within which the 
required independent testing function must be performed; (2) 
qualification and independence standards for those who conduct such 
testing function; and (3) jurisdictional requirements pertaining to AML 
Officers (as defined below). The text of the proposed rule change is 
available on the NYSE's Web site (http://www.NYSE.com), at the NYSE's 
principal office, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule changes. 
The text of these statements may be examined at the places specified in 
Item IV below.

[[Page 38995]]

The Exchange has prepared summaries, set forth in Sections (A), (B), 
and (C) below, of the most significant aspects of such statements.

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

1. Purpose

Summary

    The proposed rule change consists of amendments to Rule 445 
(``Anti-Money Laundering Compliance Program'') to establish that the 
``independent testing'' requirement of the Rule must be conducted, at 
minimum, on an annual calendar-year basis by members and member 
organizations that conduct a public business, or every two years if no 
public business is conducted. The amendments also establish a standard 
to determine who is adequately qualified and sufficiently independent 
to conduct the required testing. Further, they clarify that each person 
designated to implement and monitor an Anti-Money Laundering Program 
must either be an employee of the member or member organization for 
which they are designated or, with the prior approval of the Exchange, 
an employee of a parent, affiliate, or subsidiary of the member or 
member organization. Employees of a parent, affiliate, or subsidiary of 
a member or member organization who are designated to implement and 
monitor Anti-Money Laundering Programs must consent to the jurisdiction 
of the Exchange and the member or member organization must acknowledge 
their responsibility to supervise them as employees.

Background and Detail

    Rule 445, which became effective on April 24, 2002,\3\ requires 
each member organization and each member not associated with a member 
organization to develop and implement an anti-money laundering 
(``AML'') program consistent with ongoing obligations pursuant to 
Treasury regulation 31 CFR 103.120 under the Bank Secrecy Act,\4\ as 
amended by the United and Strengthening America by Providing 
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA 
PATRIOT ACT) Act of 2001.\5\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 45798 (April 22, 
2002); 67 FR 20854 (April 26, 2002) (SR-NYSE-2002-10).
    \4\ Currency and Foreign Transactions Reporting Act of 1970 
(commonly referred to as the Bank Secrecy Act), 12 U.S.C. 1829b, 12 
U.S.C. 1951-1959, and 31 U.S.C. 5311-5330.
    \5\ Pub. L. 107-56, 115 Stat. 272 (2001).
---------------------------------------------------------------------------

    The prescribed AML program obligations include the development of 
internal policies, procedures and controls; the designation of a person 
to implement and monitor the day-to-day operations and internal 
controls of the program (commonly referred to as an ``AML Officer''); 
ongoing training for appropriate persons; and an independent testing 
function for overall compliance.
    Neither the Bank Secrecy Act nor Rule 445 currently specifies: (1) 
Timeframes within which the independent testing function must be 
performed, (2) qualification and independence standards for those who 
conduct such testing function, or (3) jurisdictional requirements 
pertaining to AML Officers. In order to provide interpretive clarity to 
the text, the following amendments to Rule 445 are proposed.

Timeframes for Independent Testing

    The proposed amendments would require that independent testing of 
AML programs be conducted, at a minimum, on an annual (calendar-year) 
basis by members or member organizations that conduct a public 
business, or every two years if no public business is conducted (i.e., 
if the member or member organization engages solely in proprietary 
trading, and/or conducts business only with other broker-dealers). The 
Exchange believes these timeframes are reasonable in that they require 
more frequent testing of AML programs designed to monitor a public 
business, which is likely more susceptible to money laundering schemes 
than strictly proprietary business. Further, the one-year time frame 
for testing is consistent with standard industry practice in that it is 
similar to generally accepted guidelines for conducting tests in the 
context of, for instance, general audits and branch office visits. 
However, the proposed amendments make clear that more frequent testing 
should be conducted if circumstances warrant (e.g., should the business 
mix of the member or member organization materially change; in the 
event of a merger or acquisition; in light of systemic weaknesses 
uncovered via testing of the AML program; or in response to any other 
``red flags'').

Qualification and Independence Standards for Testing

    With regard to who is adequately qualified and sufficiently 
independent to conduct the independent testing function, the proposed 
amendments would require that testing be conducted by a designated 
person with a working knowledge of applicable requirements under the 
Bank Secrecy Act and its implementing regulations. Such person need not 
be an employee of the member or member organization since the 
responsibility being delegated is essentially an auditing function and, 
as such, it would not be unusual or ineffective for it to be performed 
by an independent outside party. As noted below, the proposed 
amendments require that the day-to-day responsibilities for monitoring 
operations and internal controls of AML programs be performed by a 
person fully subject to the supervision of the member or member 
organization for which they are designated, and to the jurisdiction of 
the Exchange.
    The proposed amendments do not preclude an employee of the member 
or member organization from conducting the required independent testing 
of the AML program; however the proposed ``independence'' standard 
would prohibit testing from being conducted by a person who performs 
the functions being tested, or by the designated AML compliance 
officer, or by a person who reports to either. This standard is 
designed to promote the independence, and thus the integrity, of the 
testing function by insulating it from the day-to-day administration of 
the activities being tested. It also serves to remove the testing 
function from the supervisory structure of the member or member 
organization, thus eliminating the possibility that a person might not 
candidly report shortcomings in a system designed by their supervisor 
for fear of reprisal.

Jurisdiction Over AML Officers

    The proposed amendments clarify that the person or persons 
designated to implement and monitor a member's or member organization's 
Anti-Money Laundering Program (commonly referred to as an AML Officer, 
as previously indicated) must either be an employee of the member or 
member organization for which they are designated or, with the prior 
approval of the Exchange, an employee of a parent, affiliate or 
subsidiary of the member or member organization.
    The rationale behind the proposal to allow employees of parents, 
affiliates and subsidiaries to be designated AML Officers of members 
and member organizations is the recognition that AML programs may be 
integrated into, and extend throughout, the corporate family. 
Accordingly, a person acting as an AML Officer for both a member 
organization and the member organization's parent bank would be better 
situated to see the ``big picture'' (i.e., to monitor the movements of 
funds

[[Page 38996]]

and securities throughout the corporate structure and, thus, be better 
able to identify and understand AML issues across the range of such 
structure). The ability to situate AML Officers where they can be most 
effective gives members and member organizations the flexibility to 
integrate their AML program into the larger corporate structure to 
achieve a more global perspective, and thus a more comprehensive and 
effective AML program.
    The prior written approval of the Exchange is required if the 
designated AML Officer is other than an employee of the member or 
member organization. Further, each such person must execute an 
attestation, acceptable to the Exchange, consenting to the supervision 
of each member or member organization for which they are designated and 
to the jurisdiction of the Exchange. A proposed example of such an 
attestation is included in Exhibit 3 of the proposed rule change, which 
is available on the NYSE's Web site (http://www.NYSE.com), at the 
NYSE's principal office, and at the Commission's Public Reference Room, 
under the heading ``AML Officer Consent to Jurisdiction.'' In addition, 
the member or member organization must execute an agreement, acceptable 
to the Exchange, acknowledging their responsibility to supervise, as an 
employee for all regulatory purposes, each such person designated by 
them. A proposed example of such an agreement is included in Exhibit 3 
of the proposed rule change under the heading ``Acknowledgement of 
Supervisory Responsibility over AML Officer.''
2. Statutory Basis
    The proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange, and in particular, with the requirements 
of Sections 6(b)(5) \6\ of the Exchange Act. Section 6(b)(5) requires, 
among other things, that the rules of an exchange be designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and national 
market system, and in general, to protect investors and the public 
interest. NYSE believes that the proposed rule change is designed to 
accomplish these ends by requiring members to conduct periodic tests of 
their AML compliance programs, preserve the independence of their 
testing personnel, and ensure the accuracy of their AML compliance 
program.\7\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b)(5).
    \7\ Statement regarding NYSE beliefs is based on statements by 
the NYSE during a conference call with the staff of the Division of 
Market Regulation on June 27, 2005.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposal does not impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Exchange Act.

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

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. The Commission particularly 
urges commenters to consider the proposed rule change in light of a 
similar but not identical proposed rule change by the National 
Association of Securities Dealers, Inc. (``NASD'').\8\
---------------------------------------------------------------------------

    \8\ The text of the proposed rule change is available on the 
NASD's Web site (http://www.nasd.com), at the NASD's Office of the 
Secretary, and at the Commission's Public Reference Room.
---------------------------------------------------------------------------

    Specifically, the NYSE and NASD proposals differ in who would be 
permitted to serve as an AML Officer. As discussed above, the NYSE 
proposal would, subject to certain restrictions, permit the AML Officer 
to be an employee of a parent, affiliate, or subsidiary of a member. 
The NASD proposal, however, would require the AML Officer to be an 
``associated person of the member,'' as that term is defined in Article 
I(dd) of the NASD By-Laws. Serving as an AML Officer, by itself, would 
not make a person an associated person of an NASD member. What issues, 
if any, would arise from the application of both standards regarding 
who can serve as an AML Officer at firms that are dual members of the 
NYSE and NASD?
    The NYSE and NASD proposals also differ in who would be permitted 
to perform the independent testing function for AML compliance. 
Primarily to accommodate smaller firms, the NASD proposal would permit 
an employee who reports to a person who performs the functions being 
tested and/or reports to the AML Officer to perform the independent 
testing, if, among other requirements, the member has no other 
qualified internal personnel to conduct the test and the member creates 
a written policy to address conflicts. The NYSE proposal, however, 
would not permit an employee who reports to a person who performs the 
functions being tested or reports to the AML Officer to perform the 
independent testing. How would these standards, if adopted, affect the 
AML program of dual members of the NYSE and NASD? Firms are invited to 
discuss how this would affect their specific operations.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSE-2005-36 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NYSE-2005-36. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro/shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the

[[Page 38997]]

public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NYSE.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to the File Number SR-NYSE-2005-
36 and should be submitted on or before July 27, 2005. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3539 Filed 7-5-05; 8:45 am]
BILLING CODE 8010-01-P