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SEC Rulemaking and Other Initiatives
The SEC has long recognized the important contributions that foreign issuers and foreign financial service providers bring to the US financial markets and to US investors. The SEC, in its domestic rulemaking, considers the impact of its rules upon foreign market participants active in US markets. The Commission also considers the manner in which its initiatives affect the cross-border activities of US issuers and US financial service providers. Highlighted below are recent rulemakings and other SEC initiatives where particular international considerations have been, or are being, addressed.
Intermediaries and Markets
Self-Regulation
In January 2005, the Commission proposed new rules relating to
the governance, administration, transparency, and ownership of self-regulatory
organizations (SROs) that are national securities exchanges or registered
securities associations. The proposals relate to the periodic reporting
of information by these SROs regarding their regulatory programs.
The proposals also address the listing and trading by SROs of their
own or affiliated securities. In the proposing release, the Commission
noted that it shares the goal of the international regulatory community
in seeking greater convergence of robust standards for oversight
of the securities markets, and recognizes that the proposals would
impact foreign exchanges seeking to conduct business directly in
the US market. Accordingly, the Commission specifically requested
comment from foreign exchanges and market participants about these
rule changes.
Credit Rating Agencies
In June 2003, the Commission issued a concept release
soliciting public comment on various issues regarding credit rating
agencies, including whether credit ratings should continue to be
used for regulatory purposes under the federal securities laws,
and, if so, the process of determining whose credit ratings should
be used and the level of oversight to apply to such credit rating
agencies. To address certain issues raised in response to the Concept
Release, in March 2005, the Commission proposed a new rule intended
to provide clarity regarding whether a credit rating agency is a
"nationally recognized statistical rating organization" for SEC
regulatory purposes, and to provide interpretations of that definition.
Internationally, the SEC staff also participated in the drafting
of the Fundamentals of a Code of Conduct for Credit Rating Agencies,
which was recently published by the International Organization of
Securities Regulators.
Consolidated Supervised Entities
Effective August 2004, the Commission adopted rule amendments
that establish a voluntary, alternative method for computing net
capital for certain broker-dealers. As a condition to its use of
the alternative method, a broker-dealer's ultimate holding company
and affiliates (referred to collectively as a consolidated supervised
entity or CSE) must consent to group-wide Commission supervision.
These rules, among other things, respond to international developments.
Specifically, affiliates of certain US broker-dealers that conduct
business in the European Union (EU) have stated that they must demonstrate
that they are subject to consolidated supervision at the ultimate
holding company level that is "equivalent" to EU consolidated supervision.
Commission supervision incorporated into these rule amendments is
intended to meet this standard. As a result, the SEC believes these
amendments will minimize duplicative regulatory burdens on firms
that are active in the EU, as well as in other jurisdictions that
may have similar laws.
Investment Advisers and Hedge Funds
Hedge Fund Adviser Registration
In light of the growth of hedge funds, the broadening exposure
of investors to hedge fund risk, and the growing number of instances
of malfeasance by hedge fund advisers, in December 2004, the Commission
adopted a new rule and rule amendments requiring the registration
of certain advisers to hedge funds. The rules, among other things,
generally require certain offshore advisers of hedge funds with
more than 14 US investors, determined on a "look-through" basis,
to register with the SEC under the Investment Advisers Act of 1940,
regardless of the amount of assets the adviser has under management.
Notably, the rules limit the extraterritorial application of the
Advisers Act that would otherwise occur as a result of the new rule,
by providing that an offshore adviser to an offshore private fund
may treat the fund (and not the investors) as its client for most
purposes under the Act. Accordingly, because the SEC does not apply
most of the substantive provisions of the Act to the non-US clients
of an offshore adviser, and because the offshore fund would be a
non-US client, the substantive provisions of the Act generally would
not apply to the offshore adviser's dealings with the offshore fund.
Issuer Disclosure and Reporting Obligations
Relief for First-time Application of International Financial Reporting Standards
To facilitate the transition to International Financial Reporting
Standards (IFRS) by a growing number of SEC-registered foreign companies,
effective May 2005, the SEC adopted amendments to provide a one-time
accommodation relating to financial statements prepared for the
first time under IFRS for foreign private issuers registered with
the SEC. The accommodation permits eligible foreign private issuers
for their first year of reporting under IFRS to file two years rather
than three years of statements of income, changes in shareholders'
equity and cash flows prepared in accordance with IFRS, with appropriate
related disclosure. The accommodation retains current requirements
regarding the reconciliation of financial statement items to US
GAAP.
Termination of a Foreign Private Issuers Registration and Reporting Requirements
Under current SEC rules, a foreign private issuer may find it
difficult to terminate its registration and reporting obligations
under the Securities Exchange Act of 1934 despite the fact that
there is relatively little interest in the issuer's securities among
US investors. To address this and other concerns, in December 2005,
the Commission proposed to amend the rules allowing a foreign private
issuer to exit the Exchange Act registration and reporting regime.
The proposed rules would permit the termination by a foreign private
issuer of Exchange Act reporting regarding a class of equity securities
under either section 12(g) or section 15(d) of the Exchange Act,
and the termination of section 15(d) reporting obligations regarding
a class of debt securities, as long as it meets specified criteria
designed to measure US market interest for that class of equity
or debt securities. At the same time, the proposed rules would seek
to provide US investors with ready access through the Internet to
material information about a foreign private issuer that is required
by its home country on an ongoing basis after it has exited the
Exchange Act reporting system. The Commission is seeking comments
on this proposal on or before February 28, 2006.
Accounting and Auditing
Convergence of Accounting Standards
For the past several years, the
Financial Accounting Standards Board (FASB) and the International
Accounting Standards Board (IASB), the standards setters for US
Generally Accepted Accounting Principles (US GAAP) and International
Financial Reporting Standards (IFRS), respectively, have been engaged
in a project to converge the two sets of standards. The SEC staff
has been very supportive of this project and, in April 2005, issued
a "roadmap" of the precursor milestones to eliminating the US requirement
that financial statements prepared under IFRS be reconciled to US
standards in the financial disclosures of foreign companies selling
shares in the United States. The staff's roadmap states that eliminating
the reconciliation requirement will involve, among other things,
a detailed analysis of the faithfulness and consistency of the application,
interpretation and enforcement of IFRS in financial statements across
companies and jurisdictions, combined with continued progress in
the convergence work now being conducted by the IASB and FASB.
Sarbanes-Oxley Reforms
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, which he characterized as "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt." The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the Public Company Accounting Oversight Board to oversee the activities of the auditing profession. All SEC rulemaking and reports issued under the Sarbanes-Oxley Act are available online.
In implementing the Act, the SEC was mindful of the impact of its rules on foreign issuers and market participants, particularly where conflicts with foreign law existed. Where possible, the SEC, as has been its historical practice, has afforded accommodations to foreign firms to avoid conflicts of law where consistent with the letter and spirit of the Sarbanes-Oxley Act. Dialogue with our foreign counterparts, including through roundtables and the comment letter process, was critical to these efforts.
Spotlight on
Anti-Money Laundering Rulemaking
- Market Regulation No-Action Letter: Securities Industry Association, extending February 12, 2004 letter (February 10, 2005)
- Market Regulation No-Action Letter: Securities Industry Association (February 12, 2004)
- Question and Answer Regarding the Broker-Dealer Customer Identification Program Rule (October 1, 2003)
- Questions and Answers Regarding the Mutual Fund Customer Identification Program Rule (August 11, 2003)
- Customer Identification Programs for Mutual Funds (April 29, 2003)
- Report to Congress under the USA PATRIOT Act containing recommendations for applying anti-money laundering controls to investment companies (Joint Report of the SEC, U.S. Treasury and the Board of Governors of the Federal Reserve System, December 31, 2002)
- SEC-SIA Anti-Money Laundering Webcast Scheduled for Monday, November 25, 2002 (announcement, October 18, 2002)
- Proposed Amendment to the Bank Secrecy Act Rules — Requirement That Insurance Companies Report Suspicious Transactions (in PDF format; U.S. Treasury Rulemaking, October 17, 2002).
- Proposed Amendment to the Bank Secrecy Act Rules — Anti-Money Laundering Programs for Unregistered Investment Companies (in PDF format; U.S. Treasury rulemaking, September 26, 2002)
- Proposed Amendment to the Bank Secrecy Act Rules — Customer Identification Programs for Mutual Funds (Joint SEC and U.S. Treasury rulemaking, July 23, 2002)
- Proposed Amendment to the Bank Secrecy Act Rules — Customer Identification Programs for Broker-Dealers (Joint SEC and U.S. Treasury rulemaking, July 23, 2002)
- Amendment to the Bank Secrecy Act Rules — Requirement that Brokers or Dealers in Securities Report Suspicious Transactions (in PDF format; U.S. Treasury Final Rule, July 1, 2002).
- Proposed Rule — Due Diligence Anti-Money Laundering Programs for Certain Foreign Accounts Implementing Section 312 of the USA PATRIOT ACT (in PDF format; U.S. Treasury Rulemaking, May 30, 2002)
- Anti-Money Laundering Programs for Mutual Funds (in PDF format; U.S. Treasury rulemaking, April 24, 2002)
- Order Approving Proposed Rule Changes Relating to Anti-Money Laundering Compliance Programs (NASD and NYSE Rulemaking; April 22, 2002)
- Proposed Amendment to the Bank Secrecy Act — Requirement of Brokers or Dealers in Securities to Report Suspicious Transactions (in PDF format; U.S. Treasury rulemaking, December 21, 2001)
Speech by SEC Staff:
Anti-Money Laundering in 2006: It's the "Total Mix"
by
Lori A. Richards
Director, Office of Compliance Inspections and
Examinations
U.S. Securities and Exchange Commission
Sixth Annual Anti-Money Laundering Conference
Securities Industry Association
March 29, 2006
Good afternoon. I am so pleased to be here today.
I want to thank Alan Sorcher and the SIA's Anti-Money Laundering
Committee for organizing this valuable event and for inviting me
back to speak with you once again regarding anti-money laundering
("AML") compliance.
In thinking about this conference, I was amazed to
realize that it's been five years since I first spoke to this group
regarding AML compliance - way back in May 2001!
We've come a long way in that time period. After all, the SIA's
first AML conference took place before the terrible events of September
11, 2001, and well before the USA PATRIOT Act
and its implementing regulations came into being.
Today, we're all AML "veterans" - - that
is, AML compliance has entered a more mature phase. Regulations
have been issued; basic AML programs should be in place; firm employees
should have received their AML training; and firms should be identifying
and addressing suspicious activity. From a regulatory perspective,
the SEC and the SROs have largely finished a first round of AML
examinations and now are beginning to take a "second look"
at firms' AML programs. We're now all faced with the ongoing challenges
of AML compliance. Along with all of the technical issues and complexity
of AML work, one of our challenges is to not lose sight of our ultimate
goal -- to deter money launderers and terrorist financiers from
using U.S. securities firms and to detect those who do. As we're
in the trenches in this work every day, we must also keep our ultimate
goal, and the importance of our work, clearly in mind.
I'd like to begin today with some observations regarding
AML in the broader compliance context. In some ways, AML compliance
is no different from compliance with other obligations: there are
legal requirements that firms must meet, firms must understand how
those obligations apply to their operations, must train employees
and ensure that they are supervised in meeting those obligations,
and must implement processes to aid compliance and detect and remedy
any violations. Independent auditors review for compliance and regulators
examine for it. In all these respects, compliance with AML rules
is no different than compliance with the net capital rules, or rules
requiring that firms seek the "best execution" of client
securities trades. My point is that there are basic steps to compliance
with any rule, and AML compliance is no different.
But, AML compliance is also different in several significant
respects.
First, there is a new "rulebook" - or should
I say, a new chapter in the AML rulebook. In addition to securities-related
statutes and rules, there are new Treasury rules as well as OFAC
lists and requirements.
Firms must identify, monitor, and educate themselves regarding these
new rules and requirements. This can be quite a challenge, I know.
Often, these AML rules and other requirements do not appear side-by-side
with the more traditional securities law requirements that firms
are accustomed to dealing with, and OFAC lists and requirements
change on a regular basis.
But there is a more profound difference. AML compliance
requires firms to look beyond "bright-line" legal requirements.
Unlike securities-law requirements that may focus on a discrete
area of a firm's business, AML compliance requires firms to ask
questions and make assessments -- from an overall, comprehensive
perspective. AML compliance often involves a "red flag"
approach to identifying risks based on the firm's customers, geography,
business model and other factors. This is markedly different than
the more traditional rule-based compliance focus. AML compliance
first requires an overall picture, so you can discern the forest
from the trees. I call this approach: looking at "the 'total
mix,'" to borrow a phrase from landmark Supreme Court securities
decisions.
Determining what is, and what is not "suspicious" in the
AML context necessitates an assessment of all of the information
available throughout the firm -- a comprehensive, coordinated "total
mix" environment. This is why the flow of information within
firms is so important - and why firms should be alert to whether
and how important information makes its way through the firm.
And, in the AML area perhaps as in no other, the AML
Officer or AML group needs to have information from, and interact
with, all relevant parts of the firm in order to identify and detect
red flags. Often, it may be that suspicious activity is only identified
with several pieces of the puzzle. Firm procedures must facilitate
these pieces coming together. If Trading isn't talking to Legal,
and New Accounts isn't talking to Compliance, and Operations and
"back office" staff talk to no one, and if these
disparate areas of the firm are not also connecting with the AML
people, then a firm's AML program can't be effective.
From an AML regulatory perspective, regulators also
need to look at the whole picture and take a coordinated, integrated
approach. For us, the "total mix," of regulators
includes the SEC and the SROs, as well as Treasury, FinCEN, and
OFAC. We all need to make unprecedented efforts to communicate and
coordinate with each other, to keep up with AML regulatory and enforcement
developments on all sides. While the SEC's oversight responsibilities
for the SROs mandate a certain baseline level of communication and
joint regulatory action, I'm very pleased to report that the SEC
and SROs have taken coordination and cooperation in the area of
AML to new levels. We meet and confer regularly to discuss examination
trends, regulatory issues and enforcement matters. We conduct joint
examinations and training for examiners. Our AML examination scopes
are similar, and to further promote consistency, we have formed
a task group to harmonize our AML examination procedures. It is
our goal to roll this out this summer.
And, as regulators, we too must look at the broader
picture. Because many regulated securities firms are now also affiliated
with banks and bank holding companies, we also consult, share information
and, as appropriate, conduct joint examinations with the federal
bank regulators. This all helps to ensure that AML compliance doesn't
"fall between the cracks" of regulatory boundaries, and
also promotes consistency in interpretations and examination coverage
across different industries.
With these observations in mind, I want to share with
you a few important issues that have come up in AML examinations
recently. As you will see, we've moved beyond the basics. Examiners
are now looking at such issues as: how a firm considers its enterprise-wide
functions and risks, including its branch offices and foreign business
relationships; the impact of new business acquisitions and outsourced
activity on firms' AML compliance programs; AML in the introducing-clearing
relationship; relationships with foreign financial institutions;
and finally, AML training. As you can see, these areas of examination
inquiry reinforce the theme of looking at how the "total
mix" of a firm's activities may impact the effectiveness
of its AML program. I also wanted to share a few tips with you to
help you prepare for some likely examination questions in these
areas.
Enterprise-Wide AML. I'll begin with what I
call "enterprise-wide" AML issues and concerns. As you
all know, the securities industry is composed of a wide variety
of firms, from the one-person shop operating from a kitchen table
and a laptop to the huge, multinational conglomerates. The "financial
supermarket" firms may have one or more commercial banks, insurance
companies, mutual fund complexes, investment banks, futures firms
and broker-dealers under their umbrellas. Many of these large and
organizationally diverse firms have created a global AML group to
manage the AML program across all affiliates in the group.
Examiners are finding that some firms of different
sizes and types may not be looking at their whole business -- on
an enterprise-wide basis -- when crafting and implementing their
AML programs. In particular, examiners have identified issues regarding
the coverage of branch offices, outsourced activities and new business
activities. Let me describe what I mean in each area.
- AML at Branch Offices: U.S. securities firms
operate all over the United States, as well as all over the world.
Indeed, in the U.S., broker-dealers have more than 115,000 branch
offices, from Honolulu to San Juan. No matter how far away from
the home office, branches should be a focus of your program. The
personnel in the branches often have the closest relationships
with customers, and are often in the best position to detect "red
flags." A firm's AML Officer should have information from and
strong lines of communications with the firm's branches. If your
firm has branch offices, you can anticipate examiner questions
regarding how the firm's branch offices are covered by the firm's
AML program.
- Outsourcing: If your firm is looking to
an affiliate or another third-party service provider to perform
certain AML functions, your firm is, and remains, responsible
for ensuring that these functions are effectively performed. As
we all know, the Customer Identification Program requirements
is the only area where Treasury has outlined conditions specifying
how firms can legally rely on another party.
In other areas, if a firm is outsourcing an AML function to another
entity, the firm can't just hope like heck that it's getting done.
You must be vigilant and check up on the relationship. Examiners
will also be checking.
- Mergers and Acquisitions: The landscape
of the securities industry is ever-changing by mergers and acquisitions
and other business combinations among firms. Examiners have found
instances where firms that have merged with or acquired other
firms may have neglected to consider the impact of the combination
on the firm's AML program. It's essential to devote resources
and energy to ensure that the AML programs at the different entities
are merged in a sound, workable way. Here are a few basic questions
that firms might ask themselves in the M&A context:
- Has our risk profile changed as a result of
this new business?
- Have our customer base, transaction mix, or
other factors changed to make our existing AML program and
systems obsolete?
- Do we have a different geographic presence
that should be addressed?
- Should we undertake enhanced training to ensure
that new and existing employees are all up to speed?
- Is there sufficient continuity with respect
to suspicious activity detection and reporting and other legal
obligations?
Suspicious Activity Monitoring, Detection and Reporting.
Since this area is really the cornerstone of firms' AML programs,
it receives a fair amount of attention from examiners. Here are
some of the issues that have arisen in the examination context,
and some steps that firms might take to enhance compliance in this
area:
- Aggregation of Information: Examiners are
finding that some firms' automated systems may not be aggregating
information in a way that gives the firm a full picture of a customer's
flow of funds. When firms review their automated systems, they
should ask: Do we take into account our "total mix" of
risk factors? For example, do our surveillance systems pick up,
and aggregate as appropriate, all relevant activity including
wires, check writing, employee transactions and proprietary trading?
- Documentation: So much of the AML landscape
is grounded in documentation. Because AML is risk-based, examiners
will look for documentation of a firm's decision-making process.
Generally, if you demonstrate that your firm devotes sufficient
resources to your suspicious activity monitoring, detection and
reporting program; your investigations are conducted and resolved
in a timely manner; and those decisions are well documented, you
should not be second-guessed by examiners.
AML in the Introducing-Clearing Context. Another
important focus area for SEC and SRO examinations is the relationship
between introducing and clearing firms. In many ways, clearing firms
are some of the biggest players in the fight against money laundering
and terrorist financing. They typically have the most resources
and sophisticated systems. They see the highest volume of securities
transactions and money flowing through accounts. They file the most
SARs. On the other hand, introducing brokers may have the most direct
contact with customers on a day-to-day basis.
Examiners have in some instances found a lack of communication
between introducing and clearing firms, and this is the area where
we see the most "finger pointing" occurring - with a back and forth
kind of dialogue that sounds like: "you are responsible;
no, you are responsible; no you are responsible…"
Obviously, this dynamic is not likely to result in good compliance.
Broker-dealers can expect that examiners will ask about the introducing-clearing
relationship. In particular, examiners will ask about the lists
of exception reports provided by the clearing firm,
and how or if they are being used by the introducing firm. The message
in this area should be clear-- an introducing and clearing firm
that together effect securities transactions -- need to work
together to meet their AML obligations.
Doing Business with Foreign Financial Institutions.
This is an area that has received a lot of attention lately. In
examinations, we've seen indications that some broker-dealers have
foreign financial institutions as customers, and they aren't even
aware of it. With Treasury's new and proposed rules under Section
312, and the problems identified in the Hartsfield case,
as well as many settlements in the banking area, you can expect
continued focus on this important area in SEC and SRO examinations.
Firms should be able to demonstrate that they have identified and
tracked their customers that fall into the definition of "foreign
financial institution."
Training - It Never Goes Out of Style. We all
know that employee training is an essential, and indeed, required
part of every AML program.
Most firms have implemented basic training programs, and certainly
there's a cottage industry of vendors out there in the AML training
space. Here's a caution: examiners are finding that some firms are
using "one size fits all" employee training programs that don't
seem to be effectively tailored for the firm. Make sure that your
AML training program is really useful to your employees and is customized
to the firm's business and its risks.
Examiners will consider whether the substance of the
firm's training program is appropriately customized to the firm's
business model and risk profile. They will ask to see copies of
training materials, and to see indications that employees attended
the training -- in particular, they will want to see that key employees,
such as those responsible for processing wires and new account information
and AML officers and staff, have been trained on AML and OFAC issues.
***
As I said at the outset, in the five years since I
first spoke to this group, we've come a long way, and AML compliance
has entered a more mature phase. In the last few years, regulators
and industry firms have worked hard to implement strong AML programs.
I want to take a moment to tip my hat to a few key players. The
SEC could not possibly do its job in this area without the efforts
of Mike Rufino and Sheila Haney at the NYSE and Emily Gordy, Alma
Angotti, George Walz and Muffie Humphrey at the NASD. And of course,
where would we be without our partners at FinCEN and OFAC? The SEC
and SROs have been working closely with them on regulatory, examination
and technical issues. I would like to welcome Bob Werner to his
new post as FinCEN Director. Coming from OFAC, he is no stranger
to us, and we look forward to continuing to work with him at FinCEN.
And, at the SEC, Karen Burgess, Katrina Carroll and David Blass
are true assets in the AML field.
I also want to recognize you, as AML professionals
in the securities industry, for your important contributions to
this collective effort. The AML rules and regulations are written
to make financial institutions serve as the "first line of defense"
in the fight against money laundering and terrorist finance. Industry
representatives contribute to the unified AML effort by participating
in the work of the Bank Secrecy Act Advisory Group, where they sit
side-by-side with staff from the SEC, SROs, Treasury and FinCEN.
Most importantly, based on our AML examination experience, we know
that firms are taking AML seriously and that you are engaged. We
have received thoughtful, intelligent questions that show us that
firms are focused on important issues and want to do the right thing.
Keep on asking questions, keep on talking with us about these issues.
The dialogue between securities firms and regulators is a positive
thing, and we are headed in the right direction.
Thank you for your time and attention.
Endnotes
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