Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the Chicago Board Options Exchange, Inc. To Establish CBOE Rule 4.20 Requiring Each Member and Member Organization To Develop and Implement an Anti-Money Laundering Compliance Program
Table of Contents
- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
- Anti-Money Laundering Compliance Program
- II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
- A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
- 1. Purpose
- 2. Statutory Basis
- B. Self-Regulatory Organization's Statement on Burden on Competition
- C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
- III. Solicitation of Comments
- IV. Commission's Findings and Order Granting Accelerated Approval of Proposed Rule Change
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),  and Rule 19b-4 thereunder,  notice is hereby given that on August 21, 2002, the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the CBOE. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change ↑
The CBOE proposes to adopt CBOE Rule 4.20, Anti-Money Laundering Compliance Program(the “Rule”). The Rule requires each member and member organization to develop and implement an anti-money laundering compliance program (“Program”) consistent with applicable provisions of the Bank Secrecy Act and the regulations thereunder. The text of the proposed rule change is below. Proposed new language is in italics.
Anti-Money Laundering Compliance Program ↑
Rule 4.20Anti-Money Laundering Compliance Program. Each member organization and each member not associated with a member organization shall develop and implement a written anti-money laundering program reasonably designed to achieve and monitor compliance with the Section 352(a) requirements of the USA PATRIOT Act (Public Law 107-56), amending Section 5318 of the Bank Secrecy Act (31 U.S.C. 5311, et seq.), and the implementing regulations promulgated thereunder by the Department of the Treasury. Each member organization's anti-money laundering program must be approved,in writing, by a member of senior management. The anti-money laundering programs required by this Rule shall, at a minimum:
(1) Establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under 31 U.S.C. 5318(g) and the implementing regulations thereunder;
(2) Establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with Section 5318(h) of the Bank Secrecy Act and the implementing regulations thereunder;
(3) Provide for independent testing for compliance to be conducted by member or member organization personnel or by a qualified outside party;
(4) Designate, and identify to the Exchange (by name, title, mailing address, e-mail address, telephone number, and facsimile number) a person or persons responsible for implementing and monitoring the day-to-day operations and internal controls of the program and provide prompt notification to the Exchange regarding any change in such designation(s); and
(5) Provide ongoing training for appropriate persons.* * * * *
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 CBOE 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 III below. The CBOE has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change ↑
1. Purpose ↑
On October 26, 2001, President Bush signed into law the USA PATRIOT Act (the “PATRIOT Act”), which amends among other laws the Bank Secrecy Act as set forth in Title 31 of the United States Code (the “Code”). The PATRIOT Act expands government powers to fight the war on terrorism and requires that financial institutions,  including broker-dealers, implement policies and procedures to that end.
Title III of the PATRIOT Act, separately known as the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (“MLAA”), focuses on the requirement that financial institutions establish anti-money laundering monitoring and supervisory systems. Specifically, MLAA Section 352, which amends Section 5318(h) of the Code, requires each financial institution to establish anti-money laundering programs by April 24, 2002 that include, at minimum: (1) The development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test programs.
Proposed CBOE Rule 4.20 incorporates MLAA Section 352 requirements and also requires that the Program be in writing and approved, in writing, by member organizations' senior management; that a designated “contact person” or persons, primarily responsible for each member's or member organization's Program, be identified to the Exchange; and that the Program's policies, procedures, and internal controls be reasonably designed to achieve compliance with applicable provisions of the Bank Secrecy Act and the implementing regulations thereunder, as they become effective.
Further, the Rule addresses members' and member organizations' obligation to establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under 31 U.S.C. 5318(g) (“Reporting of Suspicious Transactions”) and the implementing regulations thereunder. This reflects the MLAA Section 356 directive that the Department of the Treasury (“Treasury”) publish such implementing regulations, specifically applicable to registered broker-dealers, in the Federal Register by specified dates.
Accordingly, the Financial Crimes Enforcement Network (“FinCEN”), through authority granted by the Secretary of the Treasury, filed proposed amendments  to the Bank Secrecy Act regulations on December 28, 2001. MLAA Section 356 requires publication of these regulations in final form not later than July 2, 2002.
Generally, FinCEN's proposed regulations require the filing of Suspicious Activity Reports (“SARs”) in a central location, to be determined by FinCEN, within a specified timeframe initiated by the detection of facts constituting a basis for the filing. Proposed reporting criteria stress the development of a sound risk-based program.
The Rule also highlights members' and member organizations' existing and ongoing obligation to comply with applicable provisions of the Bank Secrecy Act and the implementing regulations thereunder, as they become effective.
Accordingly, and particularly in light of the PATRIOT Act amendments, members and member organizations should be cognizant of all existing and pending Bank Secrecy Act requirements. These include, but are not limited to: (1) MLAA Section 313 (“Prohibition on United States Correspondent Accounts with Foreign Shell Banks”)—Effective 12/25/01, covered financial institutions operating in the United States must sever correspondent banking relationships with foreign “shell banks,”i.e., banks without a physical presence in any country, that are not affiliated with a bank that both has a physical presence in a country and is subject to supervision by a banking authority that regulates the affiliated bank; (2) MLAA Section 312 (“Special Due Diligence for Correspondent Accounts and Private Banking Accounts”)—Effective 7/23/02, financial institutions must be prepared to apply “* * * appropriate, specific, and, where necessary, enhanced, due diligence” with respect to foreign private banking customers and international correspondent accounts; and (3) MLAA Section 326 (“Verification of Customer Identity”)—Effective 10/26/02, financial institutions must comply with a regulation issued by the Secretary of the Treasury requiring the implementation of “reasonable procedures” with respect to the verification of customer identification upon opening an account, maintaining records of information used for such verification, and the consultation of a government-provided list of known or suspected terrorists.
2. Statutory Basis ↑
The CBOE believes that the proposed rule is consistent with Section 6(b) of the Act  in general and further, the objectives of Section 6(b)(5)  in particular, in that they are designed topromote just and equitable principles of trade and to protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition ↑
The CBOE 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others ↑
No written comments were solicited or received with respect to the proposed rule.
III. 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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 will also be available for inspection and copying at the principal office of the CBOE. All submissions should refer to File No. SR-CBOE-2002-45 and should be submitted by October 8, 2002.
IV. Commission's Findings and Order Granting Accelerated Approval of Proposed Rule Change ↑
The Commission has reviewed carefully the CBOE's proposed rule change and finds, for the reasons set forth below, the proposed rule change is consistent with the requirements of Section 6 of the Act  and the rules and regulations thereunder applicable to a national securities exchange. Specifically, the Commission finds the proposed rule change is consistent with Section 6(b)(5) of the Act  because it will promote just and equitable principles of trade and protect investors and the public interest by requiring the CBOE's members and member organizations to establish, implement, and improve anti-money laundering compliance programs.
The Commission finds good cause for approving the proposed rule change before the 30th day after the date of publication of notice thereof in the Federal Register. The Commission notes that the Rule is substantially similar to anti-money laundering compliance program rules adopted by The New York Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. that the Commission approved after full notice and comment.  The Commission believes, therefore, that granting accelerated approval of the proposed rule change is appropriate and consistent with Section 6 of the Act. 
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,  that the proposed rule change (SR-CBOE-2002-45) is hereby approved on an accelerated basis.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority. Margaret H. McFarland, Deputy Secretary.
4. Financial Crimes Enforcement Network; Proposed Amendments to the Bank Secrecy Act Regulations—“Requirement of Brokers or Dealers in Securities to Report Suspicious Transactions;”—66 FR 67670 (December 31, 2001).