[Federal Register Volume 71, Number 21 (Wednesday, February 1, 2006)]
[Notices]
[Pages 5392-5394]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-1227]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53176; File No. SR-NYSE-2005-36]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 1 to the Proposed Rule 
Change To Amend Rule 445

January 25, 2006.

I. Introduction

    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''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Exchange Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change relating to amendments to 
NYSE Rule 445. The Commission published the proposed rule change for 
comment in the Federal Register on July 6, 2005.\3\ The Commission 
received one comment letter on the proposal.\4\ On January 17, 2006, 
NYSE filed a response to the comment letter,\5\ as well as Amendment 
No. 1 to the proposed rule change.\6\ This order approves the proposed 
rule change, grants accelerated approval to Amendment No. 1 to the 
proposed rule change, and solicits comments from interested persons on 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 51934 (June 29, 
2005), 70 FR 38994 (July 6, 2005).
    \4\ See letter from Alan E. Sorcher, Vice President and 
Associate General Counsel, Securities Industry Association 
(``SIA''), to Jonathan G. Katz, Secretary, SEC, dated July 27, 2005 
(the ``SIA Letter'').
    \5\ See letter from Mary Yeager, Acting Corporate Secretary, 
NYSE, to Catherine McGuire, Chief Counsel, Division of Market 
Regulation, SEC, dated January 17, 2006 (the ``NYSE Response'').
    \6\ Amendment No. 1 amended the rule text to clarify that notice 
to the Exchange, as opposed to approval by the Exchange, is required 
if a person holding the AML Officer designation (employed by an 
entity that directly or indirectly controls, or is controlled by, or 
is under common control with the member or member organization), is 
replaced by another person and the structure of the arrangement has 
been previously approved by the Exchange.
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II. Description of the Proposed Rule Change

    The proposed rule change consists of amendments to NYSE Rule 445 
(the ``Anti-Money Laundering Compliance Rule'') 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 the Anti-Money Laundering 
Compliance Rule 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 the Anti-Money Laundering Compliance Rule 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

    NYSE Rule 445, which became effective on April 24, 2002,\7\ 
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,\8\ as 
amended by the Uniting and Strengthening America by Providing 
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA 
PATRIOT ACT) Act of 2001.\9\
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    \7\ See Securities Exchange Act Release No. 45798 (April 22, 
2002); 67 FR 20854 (April 26, 2002) (SR-NYSE-2002-10).
    \8\ 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.
    \9\ Public Law No. 107-56, 115 Stat. 272 (2001).
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    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 NYSE 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

[[Page 5393]]

interpretive clarity to the text, the following amendments to NYSE Rule 
445 were 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 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 AML Officer designated to 
implement and monitor a member's or member organization's AML 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.\10\
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    \10\ If a person holding the AML Officer designation is to be 
replaced by another person, and the structure of the arrangement has 
been previously approved by the Exchange, then notice to the 
Exchange of the designation change would be sufficient if the 
previously approved arrangement remained substantively unchanged.
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    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 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, under 
the heading ``AML Officer Consent to Jurisdiction.'' \11\ 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.'' \12\
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    \11\ Exhibit 3 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.
    \12\ Id.
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III. Summary of Comments Received and NYSE Response

    The Commission received one comment letter from the SIA on the 
proposal and a response to the comment letter by NYSE.
    The SIA Letter noted that the ``NYSE proposal provides that the AML 
Compliance Person/Officer may be an employee of a parent, affiliate or 
subsidiary of the member or member organization with the `prior 
approval of the Exchange.' '' \13\ In the SIA's view prior approval 
should not be required because it would be impractical to obtain prior 
approval for each and every personnel change.\14\
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    \13\ SIA Letter, supra note 4, at 3-4.
    \14\ Id. at 4.
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    The NYSE Response indicated that NYSE ``has a strong regulatory 
interest in retaining the right to review `outside' AML Officer 
arrangements to make certain practical determinations (e.g., whether 
the proposed arrangement is structured such that the AML Officer will 
be positioned to effectively implement the member organization's AML 
Program, and whether he or she will have sufficient time and resources 
to monitor the Program's day-to-day operations and internal 
controls).'' \15\ NYSE, however, indicated that its interests rest 
primarily in reviewing the structure of the arrangement in which an 
``outside'' AML Officer is

[[Page 5394]]

employed.\16\ Accordingly, NYSE filed Amendment No. 1 to the proposed 
rule change to provide that ``if a person holding the AML Officer 
designation is to be replaced by another person, and the structure of 
the arrangement has been previously approved by the Exchange, then 
notice to the Exchange of the designation change would be sufficient if 
the previously approved arrangement remained substantively unchanged.'' 
\17\
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    \15\ NYSE Response, supra note 5, at 2.
    \16\ Id.
    \17\ Id.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
is consistent with the Act. 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 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 Nancy M. Morris, 
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 public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will 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 
File Number SR-NYSE-2005-36 and should be submitted on or before 
February 22, 2006.

V. Discussion and Findings

    After careful review, the Commission finds that 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) 
\18\ of the Exchange Act.\19\ 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. The Commission 
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.
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    \18\ 15 U.S.C. 78f(b)(5).
    \19\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
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Accelerated Approval of Amendment No. 1

    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the amendment 
is published for comment in the Federal Register pursuant to section 
19(b)(2) of the Act. Amendment No. 1 provides that notice to the 
Exchange, as opposed to approval by the Exchange, is required if a 
person holding the AML Officer designation (employed by an entity that 
directly or indirectly controls, or is controlled by, or is under 
common control with the member or member organization), is replaced by 
another person and the structure of the arrangement has been previously 
approved by the Exchange. Permitting Exchange members to submit a 
notice instead of seeking prior approval, in circumstances where the 
structure of the arrangement in which an outside AML Officer is 
employed has not changed, will permit the Exchange to monitor 
compliance while minimizing any regulatory burden on members. 
Accordingly, the Commission believes that accelerated approval of 
Amendment No. 1 is appropriate.

VI. Conclusions

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\20\ that the proposed rule change, as amended (SR-NYSE-2005-36), 
be, and hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-1227 Filed 1-31-06; 8:45 am]
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