Anti-Money Compliance Program
Independent Testing Update

In hindsight, it appears the amendments to the Anti-Money Laundering Compliance Program Rule which were announced by the NASD in Notice to Members 06-07 (NTM) are not as helpful to the financial and brokerage industry as first anticipated. Initially, it was anticipated the amendments would provide significant relief for smaller broker/dealers from the annual AML independent testing requirement.

After extended discussions with NASD senior staff, and a review of the SEC release, it appears the amendment will only affect broker/dealers that (i) engage “solely” in proprietary trading, (ii) conduct business only with other broker-dealers and/or possibly (iii) engage in mergers and acquisitions transactions. This result is based upon an expanded reading of the “execute transactions for customers” language in the amended rule.

Essentially, the NASD’s position is that to the extent there is an “execution” of a transaction for a customer by a broker/dealer, the respective firm will be obligated to test its AML Program annually. The NASD’s view of “execution” apparently includes any transaction where a ticket, application, subscription or any other document or memorandum of a transaction results in the sale or transfer of a security on behalf of a customer. This view results in a very limited exception from the one year AML independent testing obligation, as essentially any firm which “executes” transactions for “customers” will not be able to rely on the exception, including private placement, mutual fund and variable annuity limited broker/dealers. Based upon this assessment, it is clear that introducing broker/dealers are still subject to the annual independent testing rule, in spite of a poorly drafted NTM.