Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Reflect the Financial Crimes Enforcement Network's Adoption of a Final Rule on Customer Due Diligence Requirements for Financial Institutions, 69797-69800 [2019-27348]

Download as PDF Federal Register / Vol. 84, No. 244 / Thursday, December 19, 2019 / Notices 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, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the 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–C2–2019–027 and should be submitted on or before January 9, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2019–27341 Filed 12–18–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87746; File No. SR– CboeEDGA–2019–022] Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Reflect the Financial Crimes Enforcement Network’s Adoption of a Final Rule on Customer Due Diligence Requirements for Financial Institutions lotter on DSKBCFDHB2PROD with NOTICES December 13, 2019. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 5, 2019, Cboe EDGA Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGA’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The 16 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 19:13 Dec 18, 2019 Jkt 250001 Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 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 Cboe EDGA Exchange, Inc. (‘‘EDGA’’ or the ‘‘Exchange’’) is filing with the Securities and Exchange Commission (the ‘‘Commission’’), the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange, 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 provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/edga/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. 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 Exchange 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 Exchange 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 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 3 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). 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). 4 17 PO 00000 Frm 00078 These four pillars currently require broker-dealers to have written AML programs that include, at a minimum: • 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 In addition to meeting the BSA’s requirements with respect to AML programs, Exchange Members 9 must also comply with Exchange Rule 5.6, which incorporates the BSA’s four pillars, as well as requires Members’ AML programs to establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions. On May 11, 2016, FinCEN, the bureau of the Department of the Treasury 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 8 31 CFR 1023.210(b). Exchange Rule 1.5(n). 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. 9 See 1. Purpose Fmt 4703 Sfmt 4703 69797 E:\FR\FM\19DEN1.SGM 19DEN1 69798 Federal Register / Vol. 84, No. 244 / Thursday, December 19, 2019 / Notices the BSA, the CDD Rule focuses on the other three components. 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.’’ 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 EDGA Rule 5.6 to harmonize it with the FINRA rule and incorporate the fifth pillar. II. Exchange Rule 5.6 and Amendment to Minimum Requirements for Members’ AML Programs lotter on DSKBCFDHB2PROD with NOTICES 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, EDGA Rule 5.6 requires each Member to develop and implement a written AML program reasonably designed to achieve and monitor the Member’s compliance with the BSA and implementing regulations. Among other requirements, EDGA Rule 5.6 requires that each Member firm, at a minimum: (1) Establish and implement policies and procedures that can be reasonably 13 See 31 CFR 1010.230(d) (defining ‘‘beneficial owner’’) and 31 CFR 1010.230(e) (defining ‘‘legal entity customer’’). 14 See Securities Exchange Act Release No. 83154 (May 2, 2018), 83 FR 20906 (May 8, 2018) (File No. SR–FINRA–2018–016). 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). VerDate Sep<11>2014 19:13 Dec 18, 2019 Jkt 250001 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 implementing regulations; (3) provide independent testing for compliance to be conducted by Member personnel or a qualified outside party; (4) designate and identify to EDGA an individual or individuals (i.e., AML compliance person(s)) who will be responsible for implementing and monitoring the dayto-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. FinCEN’s CDD Rule does not change the requirements of Exchange Rule 5.6, and Members 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 5.6 to incorporate this ongoing customer due diligence element, or ‘‘fifth pillar’’ required for AML programs. Thus, proposed Rule 5.6(b)(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: (A) Understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and (B) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. As stated in the CDD Rule, these provisions are not new and merely codify existing expectations for Members 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 5.6 the 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 5.6. See CDD Rule Release 29421, n. 85. 17 See CDD Rule Release at 29420; 31 CFR 1023.210. 18 Id. at 29419. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 ongoing customer due diligence element, or ‘‘fifth pillar,’’ required for AML programs by the CDD Rule to aid Members 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 Members’ AML programs, the CDD Rule requires Members to update their AML programs to explicitly incorporate them. 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 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 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 19 Id. 20 Id. at 29421. at 29422. 21 Id. 22 Id. 23 Id. E:\FR\FM\19DEN1.SGM 19DEN1 Federal Register / Vol. 84, No. 244 / Thursday, December 19, 2019 / Notices 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 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 Member detects information that is relevant to assessing the customer’s risk profile, the Member must update the customer information, including the information regarding the beneficial owners of legal entity customers.27 However, there is no expectation that the Member update customer information, including beneficial ownership information, on an ongoing or continuous basis.28 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b) 29 of the Act in general, and furthers the objectives of 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 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. Specifically, the Exchange believes the proposed rule change will protect investors, because it will aid Members in complying with the CDD Rule’s requirement that Members’ AML programs include risk-based 24 Id. lotter on DSKBCFDHB2PROD with NOTICES 25 Id. 26 Id. at 29402. 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. 29 15 U.S.C. 78f. 30 15 U.S.C. 78f(b)(5). 27 Id. VerDate Sep<11>2014 19:13 Dec 18, 2019 Jkt 250001 procedures for conducting ongoing customer due diligence by also incorporating the requirement into Exchange Rule 5.6. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The proposed rule change simply incorporates into Exchange Rule 5.6 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 Members’ AML programs, the CDD Rule requires Members 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 Members 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 member firms or their customers through this proposal, and as such, the proposal imposes no new burdens on competition. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: A. Significantly affect the protection of investors or the public interest; B. impose any significant burden on competition; and C. become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the 31 17 CFR 240.15b9–1. Exchange notes that changes between the proposed Rule and FINRA Rule 3310 are nonsubstantive and relate to cross references. Act 33 and Rule 19b–4(f)(6) 34 thereunder. 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 will institute proceedings to determine whether the proposed rule change 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: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CboeEDGA–2019–022 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–CboeEDGA–2019–022. 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 (https://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, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the 32 The PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 69799 33 15 34 17 E:\FR\FM\19DEN1.SGM U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). 19DEN1 69800 Federal Register / Vol. 84, No. 244 / Thursday, December 19, 2019 / Notices 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–CboeEDGA–2019–022 and should be submitted on or before January 9, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.35 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2019–27348 Filed 12–18–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87740; File No. SR– CboeBZX–2019–106] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Rule 5.4 by Extending the Penny Pilot Program Through June 30, 2020 December 13, 2019. lotter on DSKBCFDHB2PROD with NOTICES Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 10, 2019, Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a ‘‘non-controversial’’ proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 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 Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) proposes to amend Rule 5.4 by extending the Penny Pilot Program through June 30, 2020. 35 17 CFR 200.30–3(a)(12). 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(f)(6). 1 15 VerDate Sep<11>2014 19:13 Dec 18, 2019 Jkt 250001 The text of the proposed rule change is provided below. (additions are in italics; deletions are [bracketed]) * * * * * Rules of Cboe BZX Exchange, Inc. * * * * * Rule 21.5. Minimum Increments * * * * * Interpretations and Policies .01 The Exchange will operate a pilot program set to expire on [December 31, 2019]June 30, 2020 to permit options classes to be quoted and traded in increments as low as $.01. The Exchange will specify which options trade in such pilot, and in what increments, in Information Circulars distributed to Members and posted on the Exchange’s website. The Exchange may replace any penny pilot issues that have been delisted with the next most actively traded multiply listed options classes that are not yet included in the penny pilot, based on trading activity in the previous six months. The replacement issues may be added to the penny pilot on the second trading day in the first month of each quarter. * * * * * The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/bzx/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. 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 Exchange 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 Exchange 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 The Penny Pilot Program (the ‘‘Pilot Program’’) is scheduled to expire on December 31, 2019. The Exchange proposes to extend the Pilot Program until June 30, 2020. The Exchange PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 believes that extending the Pilot Program will allow for further analysis of the Pilot Program and a determination of how the Pilot Program should be structured in the future. The Exchange is specifically authorized to act jointly with the other options exchanges participating in the Pilot Program in identifying any replacement class. The Exchange also represents that the Exchange has the necessary system capacity to continue to support operation of the Pilot Program. The Exchange believes the benefits to public customers and other market participants who will be able to express their true prices to buy and sell options have been demonstrated to outweigh the increase in quote traffic. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Securities Exchange Act of 1934 (the ‘‘Act’’) and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.5 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 6 requirements that the rules of an exchange be 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 regulating, clearing, settling, processing information with respect to, and facilitation 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. Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 7 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, the proposed rule change allows for an extension of the Pilot Program prior to its expiration on December 31, 2019 for the benefit of market participants. The Exchange believes that the Pilot Program promotes just and equitable principles of trade by enabling public customers and other market participants to express their true prices to buy and sell options. The Exchange notes that this proposal does not propose any new policies or provisions that are unique or unproven, but instead relates to the continuation of 5 15 6 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 7 Id. E:\FR\FM\19DEN1.SGM 19DEN1

Agencies

[Federal Register Volume 84, Number 244 (Thursday, December 19, 2019)]
[Notices]
[Pages 69797-69800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27348]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87746; File No. SR-CboeEDGA-2019-022]


Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Reflect the Financial Crimes Enforcement Network's Adoption of a Final 
Rule on Customer Due Diligence Requirements for Financial Institutions

December 13, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 5, 2019, Cboe EDGA Exchange, Inc. (the ``Exchange'' or 
``EDGA'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change 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(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe EDGA Exchange, Inc. (``EDGA'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission''), the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange, 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 provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/edga/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.
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 Exchange 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 Exchange 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).
---------------------------------------------------------------------------

    In addition to meeting the BSA's requirements with respect to AML 
programs, Exchange Members \9\ must also comply with Exchange Rule 5.6, 
which incorporates the BSA's four pillars, as well as requires Members' 
AML programs to establish and implement policies and procedures that 
can be reasonably expected to detect and cause the reporting of 
suspicious transactions.
---------------------------------------------------------------------------

    \9\ See Exchange Rule 1.5(n).
---------------------------------------------------------------------------

    On May 11, 2016, FinCEN, the bureau of the Department of the 
Treasury 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

[[Page 69798]]

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.''
---------------------------------------------------------------------------

    \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 EDGA 
Rule 5.6 to harmonize it with the FINRA rule and incorporate the fifth 
pillar.
---------------------------------------------------------------------------

    \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 5.6 and Amendment to Minimum Requirements for 
Members' 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, EDGA Rule 5.6 
requires each Member to develop and implement a written AML program 
reasonably designed to achieve and monitor the Member's compliance with 
the BSA and implementing regulations. Among other requirements, EDGA 
Rule 5.6 requires that each Member firm, 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 implementing 
regulations; (3) provide independent testing for compliance to be 
conducted by Member personnel or a qualified outside party; (4) 
designate and identify to EDGA 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 
program and provide prompt notification to the Exchange of any changes 
to the designation; and (5) provide ongoing training for appropriate 
persons.
---------------------------------------------------------------------------

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

    FinCEN's CDD Rule does not change the requirements of Exchange Rule 
5.6, and Members 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 5.6 to incorporate this ongoing customer due diligence element, or 
``fifth pillar'' required for AML programs. Thus, proposed Rule 
5.6(b)(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: (A) Understanding the nature and purpose of customer 
relationships for the purpose of developing a customer risk profile; 
and (B) conducting ongoing monitoring to identify and report suspicious 
transactions and, on a risk basis, to maintain and update customer 
information.
---------------------------------------------------------------------------

    \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 5.6. 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 Members 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 5.6 the ongoing customer due 
diligence element, or ``fifth pillar,'' required for AML programs by 
the CDD Rule to aid Members 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 Members' AML 
programs, the CDD Rule requires Members to update their AML programs to 
explicitly incorporate them.
---------------------------------------------------------------------------

    \18\ Id. at 29419.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

    \19\ Id. at 29421.
    \20\ Id. at 29422.
    \21\ Id.
    \22\ Id.
    \23\ Id.
---------------------------------------------------------------------------

    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

[[Page 69799]]

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\
---------------------------------------------------------------------------

    \24\ Id.
    \25\ Id.
---------------------------------------------------------------------------

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 Member 
detects information that is relevant to assessing the customer's risk 
profile, the Member must update the customer information, including the 
information regarding the beneficial owners of legal entity 
customers.\27\ However, there is no expectation that the Member update 
customer information, including beneficial ownership information, on an 
ongoing or continuous basis.\28\
---------------------------------------------------------------------------

    \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 proposed rule change is consistent 
with the provisions of Section 6(b) \29\ of the Act in general, and 
furthers the objectives of 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 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. Specifically, 
the Exchange believes the proposed rule change will protect investors, 
because it will aid Members in complying with the CDD Rule's 
requirement that Members' AML programs include risk-based procedures 
for conducting ongoing customer due diligence by also incorporating the 
requirement into Exchange Rule 5.6.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f.
    \30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule change simply incorporates into Exchange Rule 5.6 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 Members' AML programs, the CDD Rule requires Members 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 
Members 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 member firms or their customers through this proposal, and 
as such, the proposal imposes no new burdens on competition.
---------------------------------------------------------------------------

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

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \33\ and 
Rule 19b-4(f)(6) \34\ thereunder. 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 will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78s(b)(3)(A).
    \34\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeEDGA-2019-022 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-CboeEDGA-2019-022. 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 (https://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, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the

[[Page 69800]]

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-
CboeEDGA-2019-022 and should be submitted on or before January 9, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27348 Filed 12-18-19; 8:45 am]
 BILLING CODE 8011-01-P


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