[Federal Register Volume 73, Number 2 (Thursday, January 3, 2008)]
[Notices]
[Pages 527-528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-25507]
[[Page 527]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57044; File No. SR-CBOE-2007-130]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving Proposed Rule Change, as Modified by
Amendment No. 1, Relating to Anti-Money Laundering Program Rule 4.20
December 27, 2007.
I. Introduction
On November 2, 2007, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change relating to amendments to CBOE
Rule 4.20. On November 9, 2007, CBOE file Amendment No. 1 to the
proposed rule change. The proposed rule change, as modified by
Amendment No. 1, was published for comment in the Federal Register on
November 26, 2007.\3\ The Commission received no comments on the
proposal. This order approves the proposed rule change, as modified by
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. 56816 (Nov. 19,
2007); 72 FR 66006 (Nov. 26, 2007) (``Notice'').
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II. Description of the Proposed Rule Change
The proposed rule change amends CBOE's Anti-Money Laundering
Compliance Program (``the AML Program'') as codified in CBOE Rule 4.20
(``the Anti-Money Laundering Compliance Rule''), to: (1) Establish that
independent testing for compliance must be conducted at least annually
by members with a public business, or every two years if no public
business is conducted; and (2) clarify the persons designated to
implement and monitor the Anti-Money Laundering Compliance Rule. The
amendments also establish a standard to determine who is adequately
qualified and sufficiently independent to conduct the required testing.
In addition, the amendment clarifies that the person designated to
implement and monitor the Anti-Money Laundering Compliance Rule must be
an associated person of the Exchange member.
Background and Detail
Financial institutions, including broker-dealers, must develop and
implement AML Programs pursuant to the Bank Secrecy Act,\4\ as amended
by the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of
2001 (``PATRIOT Act'').\5\ Consistent with the Department of Treasury's
(``Treasury'') regulation 31 CFR 103.120 under the Bank Secrecy Act,
CBOE Rule 4.20 requires each member organization and each member not
associated with a member organization to develop and implement a
written AML program and specifies the minimum requirements for these
programs.
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\4\ 31 U.S.C. 5311 et seq.
\5\ Pub. L. No. 107-56, 115 Stat. 272 (2001).
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The AML program must 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.
In order to provide interpretive clarity to the requirements under
CBOE Rule 4.20 with respect to independent testing and AML Officers, as
well as to clarify references to the Bank Secrecy Act, CBOE proposed
the following amendments to CBOE Rule 4.20.
References to Bank Secrecy Act
The proposed rule change would delete references to certain
sections of the Bank Secrecy Act and a reference to the USA PATRIOT Act
to more clearly reflect the requirements under CBOE Rule 4.20.
Timeframes for Independent Testing
The proposed rule change would require that independent testing of
AML programs be conducted, at a minimum, on an annual (calendar-year)
basis by members or member organizations, unless the member or member
organization does not execute transactions for customers or otherwise
hold customer accounts or act as an introducing broker with respect to
customer accounts (e.g., engages solely in proprietary trading, or
conducts business only with other broker-dealers), in which case such
independent testing would be required every two years (on a calendar-
year basis). CBOE believes these timeframes are reasonable in that they
require more frequent testing of AML programs designed to monitor a
business with customers from the general public, which may be more
susceptible to money laundering schemes than a strictly proprietary
business involving transactions with other broker-dealers. 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 rule change establishes
only a minimum requirement, and makes clear that members should
undertake more frequent testing when 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
The proposed rule change would further 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 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.
The proposed rule change does 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, by the designated AML Officer or
by a person who reports toeither.
The proposed rule change would be generally consistent with the
approach taken by the regulatory arms of the New York Stock Exchange
(``NYSE'') and the National Association of Securities Dealers
(``NASD''), n/k/a the Financial Industry Regulatory Authority, Inc.,
(``FINRA''),\6\ regarding independent testing of AML Programs, with
variations where necessary to account for the differences in CBOE
membership--in particular, differences
[[Page 528]]
in firm size, types of businesses conducted, and overall business
models. It should be noted that the over whelming majority of CBOE's
membership consists of broker-dealers that are not members of either
NYSE or FINRA and that conduct business only with other broker-dealers.
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\6\ On July 26, 2007, the Commission approved a proposed rule
change filed by NASD to amend NASD's Certificate of Incorporation to
reflect its name change to Financial Industry Regulatory Authority
Inc., or FINRA, in connection with the consolidation of the member
firm regulatory functions of NASD and NYSE Regulation, Inc. See
Securities Exchange Act Release No. 56146 (July 26, 2007); 72 FR
42190 (Aug. 1, 2007).
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AML Officer
The proposed rule change would also clarify that the AML Officer(s)
must be an associated person of the member. This would not prohibit a
member that is part of a diversified financial institution from
designating an AML Officer that is employed by the member's parent
company, sister company, or other affiliate. However, if such a person
is designated as a member's AML Officer, CBOE would consider that
person to be an associated person of the member with respect those
activities performed on behalf of the member.
III. 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 Section 6(b)(5)
\7\ of the Exchange Act.\8\ 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 programs.
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\7\ 15 U.S.C. 78f(b)(5).
\8\ 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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IV. Conclusions
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\9\ that the proposed rule change, as amended (SR-CBOE-2007-130),
be, and hereby is, approved.
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\9\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-25507 Filed 1-2-08; 8:45 am]
BILLING CODE 8011-01-P