Document ID: SEC-2007-1594-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2007-11-26T05:00Z

[Federal Register: November 26, 2007 (Volume 72, Number 226)]
[Notices]               
[Page 66006-66008]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26no07-79]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56816; File No. SR-CBOE-2007-130]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Amend its 
Rule 4.20 Regarding Anti-Money Laundering

November 19, 2007.
    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 November 2, 2007, the Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') 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 
substantially prepared by the CBOE. On November 9, 2007, CBOE filed 
Amendment No. 1 to the proposed rule change. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend CBOE Rule 4.20, codifying the Anti-Money 
Laundering Compliance Program (the ``AML Program''), to: (1) Establish 
independent testing for compliance 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 
text of the proposed rule change is provided below. The text of the 
proposed rule change is available on the Exchange's Web site (http://www.cboe.org/Legal
), 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, 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 those statements may be examined at the places specified in 
Item IV below. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Financial institutions, including broker-dealers, must develop and 
implement AML Programs pursuant to the Bank Secrecy Act,\3\ as amended 
by Section 352 of the Uniting and Strengthening America by Providing 
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA 
PATRIOT Act) Act of 2001 (``PATRIOT Act'').\4\ Consistent with the 
Department of Treasury's (``Treasury'') regulation 31 CFR 103.120 under 
the Bank Secrecy Act, CBOE Rule 4.20 requires that each member 
organization and each member not associated with a member organization 
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 proposes 
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 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 is 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

[[Page 66007]]

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 being delegated 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 to either.
    The proposed rule change would be generally consistent with the 
approach taken by the NYSE and NASD, n/k/a the Financial Industry 
Regulatory Authority, Inc., (``FINRA''),\5\ regarding independent 
testing of AML Programs, with variations where necessary to account for 
the differences in CBOE membership--in particular, differences in firm 
size, types of business conducted, and overall business models. It 
should be noted that CBOE's membership is comprised of an over-whelming 
majority of members who are broker-dealers that are not members of 
either NYSE or FINRA and who conduct business only with other broker-
dealers. It should be further noted that CBOE conducts routine 
examinations of all capital computing members to test the adequacy of 
AML compliance programs with the objective of determining whether 
member firms' AML compliance programs are reasonably designed to 
achieve and monitor compliance with the requirements of the Bank 
Secrecy Act and applicable Treasury, Commission, and CBOE rules. 
Additionally, for all non-capital computing CBOE members, CBOE requires 
that each broker-dealer member file an annual attestation that 
identifies: (1) The designated AML Compliance Officer; (2) the broker-
dealer annual training, including a list of attendees and date 
conducted; (3) the independent review, including date and 
identification of the reviewer. The attestation also includes a 
statement regarding broker-dealer members maintaining written 
documentation of the independent review conducted.
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 to those 
activities performed on behalf of the member.
2. Statutory Basis
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 31 U.S.C. 5311 et seq.
    \4\ Pub. L. 107-56, 115 Stat. 272 (2001).
    \5\ 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).
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    CBOE believes that the proposed rule change is consistent with 
Section 6 of the Act \6\ in general and furthers the objectives of 
Section 6(b)(5) \7\ 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. CBOE 
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 person 
information.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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 change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-CBOE-2007-130 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-CBOE-2007-130. This 
file number should be included on the subject line if e-mail 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 Web site (http://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

[[Page 66008]]

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 Section, 100 F Street, 
NE., Washington, DC 20549-1090, on official business days between the 
hours of 10 a.m. and 3 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
CBOE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
CBOE-2007-130 and should be submitted on or before December 17, 2007.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-22894 Filed 11-23-07; 8:45 am]

BILLING CODE 8011-01-P