[Federal Register Volume 70, Number 128 (Wednesday, July 6, 2005)]
[Notices]
[Pages 38990-38992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3543]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51935; File No. SR-NASD-2005-066]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Amendments to NASD Rule 3011 and the Adoption of New Related 
Interpretive Material

June 29, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 23, 2005, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by NASD. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rule 3011 and adopt new related 
interpretive material (``IM''), to (1) require each member to conduct 
the independent test of its anti-money laundering program on an annual 
basis, with the exception of certain types of firms, which would be 
allowed to test every two years; (2) clarify the persons not considered 
to be independent for purposes of Rule 3011(c), and therefore not 
eligible to conduct the test; and (3) require a member to review and 
update, if necessary, the accuracy of the member's anti-money 
laundering compliance person information on a quarterly basis. The text 
of the proposed rule change is available on NASD's Web site (http://www.nasd.com), at NASD's Office of the Secretary, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD 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
    Financial institutions, including broker-dealers, must develop and 
implement anti-money laundering (``AML'') programs pursuant to the Bank 
Secrecy Act,\3\ as amended by Section 352 of the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001 
(``PATRIOT Act'').\4\ Consistent with Treasury regulation 31 CFR 
103.120 under the Bank Secrecy Act, NASD Rule 3011 requires that each 
member develop and implement a written AML program and specifies the 
minimum requirements for those programs.
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    \3\ 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.
    \4\ Pub. L. 107-56, 115 Stat. 272 (2001).
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Independent Testing

    One of the AML program requirements is that firms independently 
test their AML programs. Testing allows a member to review and assess 
the adequacy of the firm's AML program and the firm's degree of 
compliance with its written procedures. Test results alert members to 
any deficiencies in their AML programs, thereby allowing them to take 
appropriate corrective action or disciplinary action as the situation 
may warrant. The independent test report also is an important tool for 
regulators during their examinations of firms for

[[Page 38991]]

AML compliance to, among other things, ensure that the firms are 
following up with corrective action when such tests discover AML 
program deficiencies.

Frequency of Testing

    Neither the Bank Secrecy Act nor Rule 3011 currently specifies the 
frequency of independent testing, and members have asked NASD for 
guidance on this issue. Given the important role that testing plays in 
a firm ensuring that its AML program is effective in preventing money 
laundering activities from occurring at or through the firm and, in 
order to assure that member AML programs are serving their regulatory 
purposes, the proposed rule change would require in most instances that 
firms test their AML programs at least annually (on a calendar-year 
basis). Certain firms, however, because of their business models and 
activities may be able to test on a less frequent basis. Therefore, the 
proposed rule change would allow members that do not execute 
transactions for customers or otherwise hold customer accounts or act 
as an introducing broker with respect to customer accounts to test at 
least once every two years (on a calendar-year basis), rather than on 
an annual basis. Examples of these types of firms may include firms 
that engage solely in proprietary trading or that conduct business only 
with other broker-dealers. In either case, the proposed rule change 
establishes a minimum requirement, and members should undertake more 
frequent testing than required if circumstances warrant.

Establishing Independence

    Rule 3011(c) allows the independent testing of a firm's AML program 
to be conducted by either member personnel or by a qualified outside 
party. Some firms may find it more cost effective to use appropriately 
trained firm personnel. In this regard, members have asked for guidance 
on how to sufficiently maintain the independence of any internal 
personnel conducting the test. The proposed rule change would require 
the person conducting the independent test to have a working knowledge 
of the applicable Bank Secrecy Act requirements and related 
implementing regulations. The proposed rule change further clarifies 
that, to ensure sufficient separation of functions for independence 
purposes, the testing cannot be conducted by the AML compliance 
person(s) designated in Rule 3011, by any person who performs the AML 
functions being tested, or by any person who reports to any of these 
persons.
    Recognizing that these limitations may effectively prevent a small 
firm from using appropriate internal personnel to conduct the tests, 
the proposed rule change would allow tests to be conducted by persons 
who report to either the AML compliance person or persons performing 
AML functions if (1) the member has no other qualified personnel to 
conduct the test; (2) the member establishes written policies and 
procedures to address potential conflicts that can arise from allowing 
the test to be conducted by a person in the reporting chain (e.g., 
anti-retaliation procedures); (3) to the extent possible, the results 
of the test are reported to someone senior to the person to whom the 
test conductor reports; and (4) the member documents its rationale, 
which must be reasonable, for determining that it has no other 
alternative than to comply in this manner.\5\ In addition, if the 
person does not report the results to a person senior to the AML 
compliance person or persons performing AML functions, the member must 
document a reasonable explanation for not doing so.
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    \5\ This exception is primarily intended to accommodate small 
firms. For example, assume that all of a small firm's employees, 
even those who do not perform any AML functions, report to the 
firm's AML compliance person who is also the sole compliance officer 
of the firm. The member could elect to use qualified internal 
personnel who do not perform AML functions to conduct the 
independent test, even though they report to the AML compliance 
officer, provided all of the conditions set forth in proposed IM-
3011-1(c)(3) have been met.
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    Consistent with SEC and NASD recordkeeping requirements, the member 
would need to retain a copy of the documented rationale, which would be 
reviewed by NASD examiners to assess whether the member's rationale 
reasonably supports its determination.
    NASD engaged in extensive discussions with the New York Stock 
Exchange, Inc. (``NYSE'') to coordinate this proposed rule change 
regarding independent testing of AML compliance programs. To the extent 
possible, NASD and the NYSE have tried to develop consistent approaches 
with variations where necessary to account for the differences in NASD 
and NYSE membership, namely, differences in firm size, types of 
businesses conducted, and overall business models.

AML Compliance Person--Review and Update of Contact Information

    Paragraph (d) of Rule 3011 requires that each member designate and 
identify to NASD the member's AML compliance person(s) and notify NASD 
of any changes to the compliance person(s)' contact information. NASD 
requires this information to, among other things, facilitate the 
efforts of the Financial Crimes Enforcement Network, pursuant to 
Section 314(a) of the PATRIOT Act and its implementing regulations, in 
requesting information from financial institutions about persons 
suspected of engaging in money laundering or terrorist activities.
    Given the important role of the AML compliance person in ensuring 
effective communication for purposes of identifying money-laundering 
and terrorist financing activities, NASD believes that members should 
review and update the AML compliance person information periodically to 
ensure its accuracy. As such, the proposed rule change would require 
that each member conduct a review and update, if necessary, of its AML 
compliance person information within 17 business days after the end of 
each calendar quarter.\6\ Quarterly reviews and updates are consistent 
with NYSE requirements.\7\
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    \6\ This proposed schedule is consistent with a member's 
quarterly FOCUS reporting schedule, as well as with a member's 
business continuity plan requirement to review and update emergency 
contact information on a quarterly basis (see NASD Rule 3520(b)). 
Similarly, the proposed schedule is consistent with the requirement 
to review and update a member's Executive Representative designation 
and contact information (see NASD Rule 1150) and to designate a 
person to receive notifications relating to continuing education, 
and the need to review and update such designation and contact 
information (see NASD Rule 1120(a)(7)). When members file their 
FOCUS reports each quarter, they are reminded of the need to review 
and update this information on the NASD Contact System.
    \7\ In Information Memo Number 02-41 (Aug. 30, 2002), the NYSE 
stated that its members should review and/or update on a quarterly 
basis (i.e., March, June, September, and December) the information 
furnished on its Electronic Filing Platform, including information 
regarding the member's or member organization's AML compliance 
person.
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    The proposed rule change also would clarify that the AML compliance 
person must be an associated person of the member. As noted in Section 
2 of this filing, NASD will announce the effective date of the proposed 
rule change in a Notice to Members to be published no later than 60 
days following Commission approval. The effective date will be not more 
than 30 days following publication of the Notice to Members announcing 
Commission approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, which requires, among other 
things, that NASD rules must be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to

[[Page 38992]]

protect investors and the public interest. NASD 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 person information.

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

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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 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 NYSE.\8\
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    \8\ The text of the proposed rule change is available on the 
NYSE's Web site (www.NYSE.com), at the NYSE's principal office, and 
at the Commission's Public Reference Room.
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    Specifically, the NASD and NYSE proposals differ in who would be 
permitted to serve as a firm's designated AML compliance contact person 
(``AML Officer''). 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. As discussed above, 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 NASD and 
NYSE?
    The NASD and NYSE 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 NASD and NYSE? 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-NASD-2005-066 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-NASD-2005-066. 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 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 NASD.
    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-NASD-2005-
066 and should be submitted on or before July 27, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3543 Filed 7-5-05; 8:45 am]
BILLING CODE 8010-01-P