Summary
On
January 25, 2006, the Securities and Exchange Commission (the
“Commission”) issued an order1 approving amendments to
New York Stock Exchange (“Exchange”) Rule 445 (“Anti-Money
Laundering Compliance Program” or the “Rule”). Rule 445 requires
Exchange members and member organizations to develop an Anti-Money
Laundering Compliance Program (“AML Program” or the “Program”)
designed to comply with the requirements of the Bank Secrecy Act and
the implementing regulations promulgated thereunder.2
Rule 445 further requires the designation of a person or persons,
commonly known as “AML Officers,” responsible for implementing and
monitoring the Program’s day-to-day operations and internal
controls. In addition, the Rule requires the “independent testing”
of the Program.
The amendments to
Rule 445 (see Exhibit A) establish a time frame for the “independent
testing” requirement; establish a standard to determine who is
adequately qualified and sufficiently independent to conduct such
testing; and establish affiliation guidelines for AML Officers (see
also Exhibits B and C). The amendments
are effective immediately.
Independent
Testing
Rule 445(3)
requires members and member organizations to provide for
“independent testing” of AML programs to be conducted by member or
member organization personnel, or by a qualified outside party.
Time Frames for
Testing
In October 2003,
the Exchange issued Information Memo 03-48 which
stated that, until the establishment of codified time frames within
which such independent audit functions must be performed, each
member and member organization must, at a minimum, develop a
definitive plan for independent testing to include a detailed
description of testing procedures and a timetable for their
completion.
The amendments to Rule
445(3) now establish that members and member organizations that
conduct a public business3 must independently test their
AML Program, at a minimum, on an annual calendar year basis. Members
and member organizations that do not conduct a public business must
independently test their AML Program, at a minimum, every two
calendar years. Section .10 of the Rule’s Supplemental Material
obliges members and member organizations to undertake more frequent
testing if circumstances warrant (e.g., a material change
to the business mix of the member or member organization; in the
event of a merger or acquisition; if testing of the AML Program
reveals systematic weaknesses; or in response to any other
regulatory “red flags”).
Qualification Standards
In addition, the amendments clarify the qualification
standards of persons who conduct the independent testing function.
Specifically, section .20 of the Rule’s Supplementary Material
requires that any such testing functions must be conducted by a
designated person with a working knowledge of the applicable
requirements of the Bank Secrecy Act and its implementing
regulations. Further, in order to promote the independence, and thus
the integrity, of the testing function by insulating it from the
day-to-day administration of the activities being tested, it may not
be conducted by a person who performs the functions being tested, by
the designated AML Officer, or by a person who reports to
either.
AML
Officers
Rule 445(4)
requires that member organizations designate, and identify to the
Exchange, an AML Officer who is responsible for overseeing the
firm’s AML Program. This provision also requires members and member
organizations to promptly notify the Exchange if there are any
changes to this designation.
AML Officer Affiliation
Guidelines
The amendments
to Rule 445(4) establish affiliation guidelines for AML Officers.
Specifically, the amendments clarify that a designated AML Officer
may either be an employee of the member or member organization or,
with the prior approval of the Exchange, an employee of a parent,
affiliate, or subsidiary of the member or member organization.
Allowing an employee of a parent, affiliate, or subsidiary to act as
AML Officer recognizes that many member organizations are part of a
corporate family. Such corporate structures may have an extensive
AML Program that encompasses and integrates several corporate
entities. Accordingly, Rule 445 affords member organizations the
flexibility to utilize an AML Officer who is optimally situated
within its corporate family, thus allowing for the monitoring of
inter-entity transactions. Such an approach can provide a more
global perspective and thus a more comprehensive and effective AML
Program.
Additional Requirements for “Outside” AML
Officers
If the person to
be designated AML Officer is an employee of a parent, affiliate, or
subsidiary, such person (i.e, the “outside” AML
Officer) must execute an attestation, acceptable to the Exchange,
consenting to the supervision of each member or member organization
for which they are designated and to the jurisdiction of the
Exchange (see Exhibit B). Also, the member or member organization
must execute an agreement, acceptable to the Exchange, acknowledging
their responsibility to supervise the designated person as an
employee for all regulatory purposes4 (see Exhibit C).
Changes in “Outside” AML
Officer Designations
As
noted above, Exchange approval of “outside” AML Officer arrangements
is required. The Exchange will review proposed arrangements to make
practical determinations
regarding
their efficacy (e.g., whether the proposed arrangement is structured such
that the AML Officer will be positioned to effectively implement the
AML Program, and whether he or she will have sufficient time and
resources to monitor the Program’s day-to-day operations and
internal controls). The review and approval process will not
necessarily focus on the qualifications of the designated AML
Officer (as such qualification determinations are the responsibility
of the member organization).
Therefore, according to section .30 of the Rule’s
Supplementary Material, if an “outside” AML Officer arrangement has
previously been approved by the Exchange, and such designated AML
Officer is to be replaced, Exchange
approval is not required for this designation change if the
previously approved arrangement is otherwise substantially
unchanged. The member or member
organization still has a duty to promptly notify the Exchange of the
change, and to ensure execution of the required attestation
documents pursuant to Rule 445(4)(C).
Questions regarding this Information Memo may be
directed to Stephen A. Kasprzak at (212)
656-5226.
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