[Federal Register Volume 85, Number 24 (Wednesday, February 5, 2020)]
[Notices]
[Pages 6636-6639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02191]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88091; File No. SR-BOX-2020-02]


Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Exchange 
Rule 10070, Anti-Money Laundering Compliance Program, To Reflect the 
Financial Crimes Enforcement Network's Adoption of a Final Rule on 
Customer Due Diligence Requirements for Financial Institutions

January 30, 2020.

    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 January 16, 2020, BOX Exchange LLC (the ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the self-regulatory organization. The Exchange files 
the proposed rule change as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) \3\ of the Act and Rule 
19b-4(f)(6) \4\ thereunder. The Commission is publishing this notice to 
solicit comments on the proposed rule from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4. The Exchange provided the Commission with 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing the proposed 
rule change as required by Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-
4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend BOX Rule 10070 (Anti-Money 
Laundering Compliance Program) to reflect the Financial Crimes 
Enforcement Network's (``FinCEN'') adoption of a final rule on Customer 
Due Diligence Requirements for Financial Institutions (``CDD Rule''). 
The text of the proposed rule change is available from the principal 
office of the Exchange, at the Commission's Public Reference Room and 
also on the Exchange's internet website at http://boxoptions.com.

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

    In its filing with the Commission, the self-regulatory organization 
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. The self-regulatory organization 
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
I. Background
    The Bank Secrecy Act \5\ (``BSA''), among other things, requires 
financial institutions,\6\ including broker-dealers, to develop and 
implement AML programs that, at a minimum, meet the statutorily 
enumerated ``four pillars.'' \7\ These four pillars currently require 
broker-dealers to have written AML programs that include, at a minimum:
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    \5\ 31 U.S.C. 5311, et seq.
    \6\ See U.S.C. 5312(a)(2) (defining ``financial institution'').
    \7\ 31 U.S.C. 5318(h)(1).
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     The establishment and implementation of policies, 
procedures and internal controls reasonably designed to achieve 
compliance with the applicable provisions of the BSA and implementing 
regulations;
     Independent testing for compliance by broker-dealer 
personnel or a qualified outside party;
     Designation of an individual or individuals responsible 
for implementing and monitoring the operations and internal controls of 
the AML program; and
     Ongoing training for appropriate persons.\8\
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    \8\ 31 CFR 1023.210(b).
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    In addition to meeting the BSA's requirements with respect to AML 
programs, Participants must also comply with Exchange Rule 10070, which 
incorporates the BSA's four pillars, as well as requires Participants' 
AML programs to establish and implement policies and procedures that 
can be reasonably expected to detect and cause the reporting of 
suspicious transactions.\9\
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    \9\ BOX Rule 10070(a)(1).
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    On May 11, 2016, FinCEN, the bureau of the Department of the 
Treasury

[[Page 6637]]

responsible for administering the BSA and its implementing regulations, 
issued the CDD Rule \10\ to clarify and strengthen customer due 
diligence for covered financial institutions,\11\ including broker-
dealers. In its CDD Rule, FinCEN identifies four components of customer 
due diligence: (1) Customer identification and verification; (2) 
beneficial ownership identification and verification; (3) understanding 
the nature and purpose of customer relationships; and (4) ongoing 
monitoring for reporting suspicious transactions and, on a risk basis, 
maintaining and updating customer information.\12\ As the first 
component is already required to be part of a broker-dealers AML 
program under the BSA, the CDD Rule focuses on the other three 
components.
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    \10\ FinCEN Customer Due Diligence Requirements for Financial 
Institutions; CDD Rule, 81 FR 29397 (May 11, 2016) (CDD Rule 
Release); 82 FR 45182 (September 28, 2017) (making technical 
correcting amendments to the final CDD Rule published on May 
11,2016). FinCEN is authorized to impose AML program requirements on 
financial institutions and to require financial institutions to 
maintain procedures to ensure compliance with the BSA and associated 
regulations. 31 U.S.C. 5318(h)(2) and (a)(2).The CDD Rule is the 
result of the rulemaking process FinCEN initiated in March 2012.See 
77 FR 13046 (March 5, 2012) (Advance Notice of Proposed Rulemaking) 
and 79 FR 45151 (Aug. 4, 2014) (Notice of Proposed Rulemaking).
    \11\ See 31 CFR 1010.230(f) (defining ``covered financial 
institution'').
    \12\ See CDD Rule Release at 29398.
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    Specifically, the CDD Rule focuses particularly on the second 
component by adding a new requirement that covered financial 
institutions identify and verify the identity of the beneficial owners 
of all legal entity customers at the time a new account is opened, 
subject to certain exclusions and exemptions.\13\ The CDD Rule also 
addresses the third and fourth components, which FinCEN states ``are 
already implicitly required for covered financial institutions to 
comply with their suspicious activity reporting requirements,'' by 
amending the existing AML program rules for covered financial 
institutions to explicitly require these components to be included in 
AML programs as a new ``fifth pillar.''
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    \13\ See 31 CFR 1010.230(d) (defining ``beneficial owner'') and 
31 CFR 1010.230(e) (defining ``legal entity customer'').
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    On November 21, 2017, FINRA published Regulatory Notice 17-40 to 
provide guidance to member firms regarding their obligations under 
FINRA Rule 3310 in light of the adoption of FinCEN's CDD Rule. In 
addition, the Notice summarized the CDD Rule's impact on member firms, 
including the addition of the new fifth pillar required for member 
firms' AML programs. FINRA also amended FINRA Rule 3310 to explicitly 
incorporate the fifth pillar.\14\ This proposed rule change amends BOX 
Rule 10070 to harmonize it with the FINRA rule and incorporate the 
fifth pillar.
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    \14\ See Securities Exchange Act Release No. 83154 (May 2, 
2018), 83 FR 20906 (May 8, 2018) (File No. SR-FINRA-2018-016).
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II. Exchange Rule 10070 and Amendment to Minimum Requirements for 
Participants' AML Programs
    Section 352 of the USA PATRIOT Act of 2001 \15\ amended the BSA to 
require broker-dealers to develop and implement AML programs that 
include the four pillars mentioned above. Consistent with Section 352 
of the PATRIOT Act, and incorporating the four pillars, Exchange Rule 
10070 requires each Participant to develop and implement a written AML 
program reasonably designed to achieve and monitor the Participant's 
compliance with the BSA and implementing regulations. Among other 
requirements, Exchange Rule 10070 requires that each Participant, at a 
minimum: (1) Establish and implement policies and procedures that can 
be reasonably expected to detect and cause the reporting of suspicious 
transactions; (2) establish and implement policies and internal 
controls reasonably designed to achieve compliance with the BSA and 
implementing regulations; (3) provide independent testing for 
compliance to be conducted by Participant personnel or a qualified 
outside party; (4) designate and identify to the Exchange a person or 
persons (i.e., AML compliance person(s)) who will be responsible for 
implementing and monitoring the day-to-day operations and internal 
controls of the AML program and provide prompt notification to the 
Exchange of any changes to the designation; and (5) provide ongoing 
training for appropriate persons.
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    \15\ Uniting and Strengthening America by Providing Appropriate 
Tools Required to Intercept and Obstruct Terrorism Act of 2001, 
Public Law 107-56, 115 Stat. 272 (2001).
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    FinCEN's CDD Rule does not change the requirements of Exchange Rule 
10070, and Participants must continue to comply with its 
requirements.\16\ However, FinCEN's CDD Rule amends the minimum 
regulatory requirements for broker-dealers' AML programs by explicitly 
requiring such programs to include risk-based procedures for conducting 
ongoing customer due diligence.\17\ Accordingly, the Exchange is 
proposing to amend Exchange Rule 10070 to incorporate this ongoing 
customer due diligence element, or ``fifth pillar'' required for AML 
programs. Thus, proposed Rule 10070(a)(6) would provide that the AML 
programs required by this Rule shall, at a minimum include appropriate 
risk-based procedures for conducting ongoing customer due diligence, to 
include, but not be limited to: (1) Understanding the nature and 
purpose of customer relationships for the purpose of developing a 
customer risk profile; and (2) conducting ongoing monitoring to 
identify and report suspicious transactions and, on a risk basis, to 
maintain and update customer information.
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    \16\ FinCEN notes that broker-dealers must continue to comply 
with FINRA Rules, notwithstanding differences between the CDD Rule 
and FINRA Rule 3310, which is substantially identical to Exchange 
Rule 10070. See CDD Rule Release 29421, n. 85.
    \17\ See CDD Rule Release at 29420; 31 CFR 1023.210.
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    As stated in the CDD Rule, these provisions are not new and merely 
codify existing expectations for Participants to adequately identify 
and report suspicious transactions as required under the BSA and 
encapsulate practices generally already undertaken by securities firms 
to know and understand their customers.\18\ The proposed rule change 
simply incorporates into Exchange Rule 10070 the ongoing customer due 
diligence element, or ``fifth pillar,'' required for AML programs by 
the CDD Rule to aid Participants in complying with the CDD Rule's 
requirements. However, to the extent that these elements, which are 
briefly summarized below, are not already included in Participants' AML 
programs, the CDD Rule requires Participants to update their AML 
programs to explicitly incorporate them.
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    \18\ Id. at 29419.
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III. Summary of Fifth Pillar's Requirements
Understanding the Nature and Purpose of Customer Relationships
    FinCEN states in the CDD Rule that firms must necessarily have an 
understanding of the nature and purpose of the customer relationship in 
order to determine whether a transaction is potentially suspicious and, 
in turn, to fulfill their SAR obligations.\19\ To that end, the CDD 
Rule requires that firms understand the nature and purpose of the 
customer relationship in order to develop a customer risk profile. The 
customer risk profile refers to information gathered about a customer 
to form the baseline against which customer activity is

[[Page 6638]]

assessed for suspicious transaction reporting.\20\ Information relevant 
to understanding the nature and purpose of the customer relationship 
may be self-evident and, depending on the facts and circumstances, may 
include such information as the type of customer, account or service 
offered, and the customer's income, net worth, domicile, or principal 
occupation or business, as well as, in the case of existing customers, 
the customer's history of activity.\21\ The CDD Rule also does not 
prescribe a particular form of the customer risk profile.\22\ Instead, 
the CDD Rule states that depending on the firm and the nature of its 
business, a customer risk profile may consist of individualized risk 
scoring, placement of customers into risk categories or another means 
of assessing customer risk that allows firms to understand the risk 
posed by the customer and to demonstrate that understanding.\23\
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    \19\ Id. at 29421.
    \20\ Id. at 29422.
    \21\ Id.
    \22\ Id.
    \23\ Id.
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    The CDD Rule also addresses the interplay of understanding the 
nature and purpose of customer relationships with the ongoing 
monitoring obligation discussed below. The CDD Rule explains that firms 
are not necessarily required or expected to integrate customer 
information or the customer risk profile into existing transaction 
monitoring systems (for example, to serve as the baseline for 
identifying and assessing suspicious transactions on a contemporaneous 
basis).\24\ Rather, FinCEN expects firms to use the customer 
information and customer risk profile as appropriate during the course 
of complying with their obligations under the BSA in order to determine 
whether a particular flagged transaction is suspicious.\25\
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    \24\ Id.
    \25\ Id.
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Conduct Ongoing Monitoring
    As with the requirement to understand the nature and purpose of the 
customer relationship, the requirement to conduct ongoing monitoring to 
identify and report suspicious transactions and, on a risk basis, to 
maintain and update customer information, merely adopts existing 
supervisory and regulatory expectations as explicit minimum standards 
of customer due diligence required for firms' AML programs.\26\ If, in 
the course of its normal monitoring for suspicious activity, the 
Participant detects information that is relevant to assessing the 
customer's risk profile, the Participant must update the customer 
information, including the information regarding the beneficial owners 
of legal entity customers.\27\ However, there is no expectation that 
the Participant update customer information, including beneficial 
ownership information, on an ongoing or continuous basis.\28\
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    \26\ Id. at 29402.
    \27\ Id. at 29420-21. See also FINRA Regulatory Notice 17-40 
(discussing identifying and verifying the identity of beneficial 
owners of legal entity customers).
    \28\ Id.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\29\ in general, and Section 
6(b)(5) of the Act,\30\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general to 
protect investors and the public interest because it will aid 
Participants in complying with the CDD Rule's requirement that 
Participants' AML programs include risk-based procedures for conducting 
ongoing customer due diligence by also incorporating the requirement 
into Exchange Rule 10070.
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    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change simply 
incorporates into Exchange Rule 10070 the ongoing customer due 
diligence element, or ``fifth pillar,'' required for AML programs by 
the CDD Rule. Regardless of the proposed rule change, to the extent 
that the elements of the fifth pillar are not already included in 
Participants' AML programs, the CDD Rule requires Participants to 
update their AML programs to explicitly incorporate them. In addition, 
as stated in the CDD Rule, these elements are already implicitly 
required for covered financial institutions to comply with their 
suspicious activity reporting requirements. Further, all Exchange 
Participants that have customers are required to be members of FINRA 
pursuant to Rule 15b9-1 under the Exchange Act,\31\ and are therefore 
already subject to the requirements of FINRA Rule 3310. Additionally, 
the proposed rule change is virtually identical \32\ to FINRA Rule 
3310. The Exchange is not imposing any additional direct or indirect 
burdens on Participants or their customers through this proposal, and 
as such, the proposal imposes no new burdens on competition.
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    \31\ 17 CFR 240.15b9-1.
    \32\ The Exchange notes that changes between the proposed Rule 
and FINRA Rule 3310 are non-substantive and relate to cross 
references.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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

    Pursuant to Section 19(b)(3)(A) of the Act \33\ and Rule 19b-
4(f)(6) \34\ thereunder, the Exchange has designated this proposal as 
one that effects a change that: (i) Does not significantly affect the 
protection of investors or the public interest; (ii) does not impose 
any significant burden on competition; and (iii) by its terms, does not 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest.
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    \33\ 15 U.S.C. 78s(b)(3)(A).
    \34\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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. Comments may be submitted by any of 
the following methods:

[[Page 6639]]

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BOX-2020-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2020-02. This file 
number should be included on the subject line if email 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 website (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 website viewing and printing in 
the Commission's Public Reference Room, on business days between the 
hours of 10:00 a.m. and 3:00 p.m., located at 100 F Street NE, 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change.
    Persons submitting comments are cautioned that we do not redact or 
edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-BOX-2020-02 
and should be submitted on or before February 26, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-02191 Filed 2-4-20; 8:45 am]
 BILLING CODE 8011-01-P