
[Federal Register: September 16, 2009 (Volume 74, Number 178)]
[Notices]               
[Page 47630-47631]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16se09-98]                         


[[Page 47630]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60645; File No. SR-FINRA-2009-039]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA 
Rule 3310 (Anti-Money Laundering Compliance Program) in the 
Consolidated FINRA Rulebook

September 10, 2009.

I. Introduction

    On June 1, 2009, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt FINRA Rule 3310 (Anti-
Money Laundering (``AML'') Compliance Program). The Commission 
published the proposed rule change for comment in the Federal Register 
on June 22, 2009.\3\ The comment period expired on July 13, 2009. The 
Commission received seven comments in response to the proposed rule 
change.\4\ On July 29, 2009, FINRA responded to the comments.\5\ This 
order approves the proposed rule change.
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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. 60112 (June 15, 
2009), 74 FR 29527 (June 22, 2009).
    \4\ See Letters from Deborah M. Castiglioni, CEO, Cutter & 
Company, Inc., dated July 9, 2009 (``Cutter''); Larry Dorn, Owner/
President/AML Officer/Financial Principal, Dorn & Co., Inc., dated 
July 16, 2009 (``Dorn''); Joe Giordano, President, Joseph James 
Financial Services, Inc., dated July 14, 2009 (``Joseph James''); S. 
Lauren Heyne, Chief Compliance Officer, RW Smith & Associates, Inc., 
dated July 13, 2009 (``RW Smith''); Judy L. Loy, CEO, Nestlerode & 
Loy Inc., dated July 8, 2009 (``Nestlerode''); William R. Pictor, 
CEO, Trubee Collins Co., Inc., dated July 10, 2009 (``Trubee 
Collins''); Terri F. Rumans, Chief Compliance Officer, Sage Rutty 
Co., Inc., dated July 13, 2009 (``Sage Rutty''). Unless otherwise 
indicated, all letters cited in this order were addressed to either 
Florence Harmon, Deputy Secretary of the Commission or Elizabeth M. 
Murphy, Secretary of the Commission.
    \5\ See Letter from Patricia Albrecht, Assistant General 
Counsel, FINRA, dated July 29, 2009 (``FINRA's Response'').
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II. Description of the Proposed Rule Change

    FINRA proposed to adopt: (1) NASD Rule 3011 (AML Compliance 
Program) as FINRA Rule 3310 (AML Compliance Program), without 
substantive change; (2) NASD IM-3011-1 (Independent Testing 
Requirements) as supplementary material to proposed FINRA Rule 3310, 
subject to certain amendments; and (3) NASD IM-3011-2 (Review of AML 
Compliance Person Information) as supplementary material to proposed 
FINRA Rule 3310, without substantive change. The proposed rule change 
would delete Incorporated NYSE Rule 445 (AML Compliance Program) in its 
entirety as duplicative.

A. Background

    NASD Rule 3011 (AML Compliance Program) and Incorporated NYSE Rule 
445 (AML Compliance Program) are substantially similar rules requiring 
members to develop and implement a written AML program reasonably 
designed to achieve and monitor compliance with the requirements of the 
Bank Secrecy Act (``BSA'') \6\ and the implementing regulations 
promulgated by the Department of the Treasury. Each member's AML 
compliance program must be approved, in writing, by a member of senior 
management.
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    \6\ See 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).
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    Both NASD 3011 and NYSE 445 require that each AML compliance 
program must, 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, procedures, and internal controls reasonably designed to 
achieve compliance with the BSA and its implementing regulations; (3) 
provide for annual (on a calendar-year basis) independent testing for 
compliance to be conducted by member personnel or a qualified outside 
party; \7\ (4) designate and identify to FINRA an individual or 
individuals (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 compliance program and provide prompt notification 
to FINRA of any changes to the designation; and (5) provide on-going 
training for appropriate persons.
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    \7\ NASD Rule 3011 permits a member to conduct the independent 
testing every two years (on a calendar-year basis) if it 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). Incorporated NYSE Rule 445 
uses slightly different terminology to achieve the same result, 
specifically providing that a member may conduct independent testing 
every two years (on a calendar-year basis) if it ``does not engage 
in a public business (e.g., engages solely in proprietary trading, 
or conducts business only with other broker-dealers).''
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    NASD IM-3011-1 (Independent Testing Requirements) and the 
supplementary material to Incorporated NYSE Rule 445 also contain 
substantially similar provisions clarifying that: (1) Members should 
undertake more frequent testing than required if circumstances warrant; 
(2) the person conducting the independent test must have a working 
knowledge of applicable requirements under the BSA and its implementing 
regulations; and (3) the testing cannot be conducted by the AML 
compliance person(s), by any person who performs the functions being 
tested, or by any person who reports to any of these persons.
    NASD IM-3011-1, however, permits the AML compliance program testing 
to be conducted by persons who report to either the AML compliance 
person or persons performing the functions being tested if: (1) The 
member has no other qualified internal personnel to conduct the test; 
(2) the member establishes written policies and procedures to address 
conflicts that may arise from allowing the test to be conducted by a 
person who reports to the person(s) whose activities he or she is 
testing (e.g., anti-retaliation procedures); (3) to the extent 
possible, the person conducting the test reports the results of the 
test to someone who is senior to the AML compliance person or persons 
performing the functions being tested; and (4) the member documents its 
rationale, which must be reasonable, for determining there is no other 
alternative than to comply in this manner. In addition, if the person 
does not report the results consistent with (3) above, the member must 
document a reasonable explanation for not doing so. This provision is 
referred to as the ``independent testing exception.'' Incorporated NYSE 
Rule 445 does not have a comparable provision.
    Finally, NASD IM-3011-2 (Review of AML Compliance Person 
Information) requires each member to identify, review, and if 
necessary, update the information regarding its AML compliance person 
in the manner prescribed in NASD Rule 1160.\8\ This provision is 
comparable to SM .03 of NYSE Rule 445.
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    \8\ FINRA is proposing to replace NASD Rule 1160 with FINRA Rule 
4540 (Member Information and Data Reporting and Filing 
Requirements). See Regulatory Notice 09-02 (January 2009).
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B. Proposed FINRA Rule 3310 and Related Supplementary Material

    The proposed rule change would adopt NASD Rule 3011 without

[[Page 47631]]

substantive change into the Consolidated FINRA Rulebook as FINRA Rule 
3310 (AML Compliance Program). In addition, the proposed rule change 
would adopt NASD IM-3011-2, without substantive change, as 
supplementary material to proposed FINRA Rule 3310.
    With respect to NASD IM-3011-1, the proposed rule change would 
adopt its provisions as supplementary material to proposed FINRA Rule 
3310, but would eliminate the independent testing exception. The 
Financial Crimes Enforcement Network (``FinCEN''), a bureau within the 
Department of the Treasury that is responsible for administering the 
BSA and its implementing regulations, has stated that the independent 
testing provision of the BSA \9\ precludes AML program testing by 
personnel with an interest in the outcome of the testing and that an 
independent testing exception, such as the one in NASD IM-3011-1, is 
inconsistent with the BSA's independent testing provision and FinCEN's 
interpretation of this provision.\10\ Accordingly, consistent with 
FinCEN's guidance, FINRA is proposing to eliminate the independent 
testing exception in connection with its adoption of proposed FINRA 
Rule 3310.
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    \9\ See 31 U.S.C. 5318(h)(1)(D). See also 31 CFR 103.120 (AML 
programs requirements for financial institutions regulated by, among 
others, self-regulatory organizations).
    \10\ See Letter from Jamal El-Hindi, Associate Director, 
Regulatory Policy & Programs Division, FinCEN, to Nancy M. Morris, 
Secretary, SEC (August 22, 2007) (``FinCEN Comment Letter''). FinCEN 
submitted the letter to the SEC in response to the NYSE's ``omnibus 
filing,'' which sought to achieve greater harmonization between the 
NYSE and NASD rules, including the AML compliance program rules (SR-
NYSE-2007-22). See Securities Exchange Act Release No. 56142 (July 
16, 2007), 72 FR 42195 (August 1, 2007).
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    Finally, as stated previously, the proposed rule change would 
delete Incorporated NYSE Rule 445 and its related supplementary 
material in their entirety as duplicative. FINRA will announce the 
implementation date of the proposed rule change in a Regulatory Notice 
to be published no later than 90 days following Commission approval.

III. Comment Letters

    Seven commenters raised objections to the elimination of the 
independent testing exception.\11\ Three commenters expressed their 
view that the exception was being eliminated to address a problem that 
has not been shown to exist.\12\ These commenters also took exception 
with FinCEN's view that the independent testing exception was 
inconsistent with the requirements of the BSA.\13\ Commenters also 
expressed concern that elimination of the independent testing exception 
would require small firms to incur additional expenses.\14\ Some 
commenters also suggested that FINRA should seek additional member 
comment on the proposed elimination of the independent testing 
exception.\15\ In responding to the comments, FINRA stated that it was 
proposing to eliminate the independent testing exception to be 
consistent with FinCEN's views regarding the BSA's independent testing 
requirements.\16\
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    \11\ See supra note 4.
    \12\ Cutter, Dorn, and Nestlerode.
    \13\ Id. The commenters asserted that employees of a small 
broker-dealer have an interest in bringing problems to light, not 
ignoring them.
    \14\ Cutter, Dorn, Joseph James, RW Smith, Sage Rutty, and 
Trubee Collins.
    \15\ Nestlerode, Cutter, RW Smith, and Dorn.
    \16\ See FINRA's Response, supra note 5. See also FinCEN Comment 
Letter, supra note 10 and accompanying text.
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IV. Discussion and Findings

    After a careful review of the proposal, the comments received, and 
FINRA's Response, 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 FINRA.\17\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Exchange Act,\18\ which requires, among other 
things, that FINRA's rules be designed to prevent fraudulent and 
manipulative practices and to promote just and equitable principles of 
trade.
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    \17\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78o-3(b)(6).
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    The Commission finds that the proposed rule change is reasonably 
designed to accomplish these ends by aligning the independent testing 
requirements of proposed FINRA Rule 3310 with FinCEN's interpretation 
of the BSA's independent testing requirement. The Commission notes in 
particular that FinCEN is responsible for administering the BSA and its 
implementing regulations. In light of FinCEN's view that the 
independent testing provisions of the BSA preclude AML program testing 
by persons with an interest in the outcome of the test, the independent 
testing exception in NASD IM-3011-1, is not consistent with the 
BSA.\19\
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    \19\ See FinCEN Comment Letter, supra note 10 and accompanying 
text.
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V. Conclusion

    It is therefore concluded, pursuant to Section 19(b)(2) of the 
Exchange Act,\20\ that the proposed rule change (SR-FINRA-2009-039) be, 
and hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Florence E. Harmon,
Deputy Secretary.
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    \21\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E9-22240 Filed 9-15-09; 8:45 am]

BILLING CODE 8010-01-P
