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, 527-528 [E7-25507]

Download as PDF Federal Register / Vol. 73, No. 2 / Thursday, January 3, 2008 / Notices 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 AntiMoney 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. pwalker on PROD1PC71 with NOTICES 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 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 56816 (Nov. 19, 2007); 72 FR 66006 (Nov. 26, 2007) (‘‘Notice’’). 2 17 VerDate Aug<31>2005 20:29 Jan 02, 2008 Jkt 214001 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. 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 brokerdealers), 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 4 31 U.S.C. 5311 et seq. L. No. 107–56, 115 Stat. 272 (2001). 5 Pub. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 527 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 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). E:\FR\FM\03JAN1.SGM 03JAN1 528 Federal Register / Vol. 73, No. 2 / Thursday, January 3, 2008 / Notices 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. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Nancy M. Morris, Secretary. [FR Doc. E7–25507 Filed 1–2–08; 8:45 am] AML Officer SECURITIES AND EXCHANGE COMMISSION 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. IV. Conclusions pwalker on PROD1PC71 with NOTICES 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. U.S.C. 78f(b)(5). 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). 9 15 U.S.C. 78s(b)(2). BILLING CODE 8011–01–P [Release No. 34–57049; File No. SR–CBOE– 2007–125] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 2 Thereto, Relating to the $1 Strike Pilot Program December 27, 2007. I. Introduction On October 31, 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 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposal to amend its rules relating to the $1 Strike Pilot Program (‘‘$1 Strike Program’’). On November 14, 2007, the Exchange filed Amendment No. 1 to the proposed rule change. The Exchange subsequently withdrew Amendment No. 1 and filed Amendment No. 2 to the proposed rule change on November 15, 2007. The proposed rule change, as amended, was published for comment in the Federal Register on November 23, 2007.3 The Commission received no comments on the proposal. This order approves the proposed rule change, as amended. II. Description of the Proposal The purpose of the proposed rule change is to expand the $1 Strike Program and to request permanent approval of the $1 Strike Program. The $1 Strike Program currently allows CBOE to select a total of 5 individual stocks on which option series may be listed at $1 strike price intervals. To be eligible for selection into the $1 Strike Program, the underlying stock must close below $20 in its primary market on the previous trading day. If selected for the $1 Strike Program, the Exchange may list strike prices at $1 intervals from $3 to $20, but no $1 strike price may be listed that is greater than $5 7 15 8 In VerDate Aug<31>2005 20:29 Jan 02, 2008 Jkt 214001 10 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 56801 (November 16, 2007), 72 FR 65784 (‘‘Notice’’). from the underlying stock’s closing price in its primary market on the previous day. The Exchange also may list $1 strikes on any other option class designated by another securities exchange that employs a similar $1 Strike Program under their respective rules. The Exchange may not list longterm option series (‘‘LEAPS’’) at $1 strike price intervals for any class selected for the $1 Strike Program. The Exchange also is restricted from listing any series that would result in strike prices being $0.50 apart. The Exchange proposes to amend Interpretation and Policy .01 to CBOE Rule 5.5 to expand the $1 Strike Program to allow it to select a total of 10 individual stocks on which option series may be listed at $1 strike price intervals. Additionally, CBOE proposes to raise the upper limit of the price range on which it may list $1 strikes from $20 to $50. The existing restrictions on listing $1 strikes would continue, e.g., no $1 strike price may be listed that is greater than $5 from the underlying stock’s closing price in its primary market on the previous day, and CBOE would be restricted from listing any series that would result in strike prices being $0.50 apart. In addition, because it believes that the $1 Strike Program has been very successful by allowing investors to establish equity options positions that are better tailored to meet their investment objectives, CBOE requests that the $1 Strike Program be approved on a permanent basis. In its filing with the Commission, CBOE stated its belief that $1 strike price intervals provide investors with greater flexibility in the trading of equity options that overlie lower priced stocks by allowing investors to establish equity options positions that are better tailored to meet their investment objectives. According to CBOE, member firms representing customers have repeatedly requested that CBOE seek to expand the $1 Strike Program, both in terms of the number of classes that can be selected and the range in which $1 strikes may be listed. CBOE concluded from its analysis of the $1 Strike Program that the impact on CBOE’s, OPRA’s, and market data vendors’ respective automated systems has been minimal.4 CBOE has represented that is has sufficient capacity to handle an expansion of the $1 Strike Program, as proposed. Finally, the Exchange proposes to make a corresponding change to 1 15 PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 4 See Notice, supra note 3, at 65785 (providing CBOE’s $1 Strike Program analysis on systems capacity). E:\FR\FM\03JAN1.SGM 03JAN1

Agencies

[Federal Register Volume 73, Number 2 (Thursday, January 3, 2008)]
[Notices]
[Pages 527-528]
From the Federal Register Online via the Government Printing 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \4\ 31 U.S.C. 5311 et seq.
    \5\ Pub. L. No. 107-56, 115 Stat. 272 (2001).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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