WASHINGTON The Securities and Exchange Commissions plan to step up exams of anti-money-laundering efforts by broker-dealers is no substitute for a long-awaited Treasury Department rule that would require all securities firms, like banks, to report suspicious activities, banking experts say.
They commented after the SEC announced last week that it is drafting exam procedures, which it will begin using by late summer or early fall, to better check whether firms have risk-management procedures in place to spot suspicious activities.
We expect a primary focus of these exams to be on the firms policies, procedures, and internal controls relating to money laundering, said Lori A. Richards, director of the SECs office of compliance inspections and examinations, in a speech at a Securities Industry Association conference Tuesday in New York. Well be looking at whether the firm has a system of monitoring for potential money laundering activities that is appropriate to its business.
Specifically, she said, a firm should consider the nature and extent of its activities, who its customers are, the types of accounts maintained for its customers, and the types of transactions its customers engage in.
Banking industry representatives welcomed the plan, which would bring SEC exams in line with those by bank regulators, but they said this alone would not be enough.
Enforcement sends a strong, positive message, but nothing is a substitute for having a requirement that potential money laundering activities be reported, said John J. Byrne, senior counsel for the American Bankers Association, echoing the comments of a securities executive at a major banking company who did not want to be named.
Securities firms that have no affiliation with a bank holding company are not required to file suspicious-activity reports with the Treasury Department. However, most large firms do so voluntarily.
The Treasury has been working five years on suspicious-activity reporting rules for the securities industry, and there is no word on when they might be proposed.
Such rules would help close a gap that a General Accounting Office report issued last month said exists in money laundering enforcement authority. This gap has kept regulators from examining bank securities affiliates for more than a year.
Bank securities affiliates are still technically subject to a 1996 rule issued by bank regulators that requires suspicious-activity reports on customers who may be engaging in money laundering. However, Gramm-Leach-Bliley in 1999 ceded most of the authority to regulate such affiliates to the SEC, which asserts that it has no statutory authority to enforce another regulators rules.
In an interview Friday, Ms. Richards said that one reason her office is refreshing its exam procedures is in anticipation of a new rule at some point in the future.
She said the exam initiative comes directly out of her office, so neither the timing of its implementation nor its content will be affected by the fact that the SEC currently has no chairman (Arthur Levitt resigned in December) and two seats on the commission are vacant. Last week President Bush announced that he plans to nominate attorney Harvey L. Pitt to be SEC chairman.
Donald T. Vangel, a former Federal Reserve Bank of New York senior vice president of bank supervision, said the exams will bring the securities industry overall, be it a bank affiliate or not, to a new examination standard which has been applied to depository institutions for a long time.
The exams will put the bank and securities supervisory agencies on the same page in terms of the kinds of things they are looking at, said Mr. Vangel, who now advises banking companies on risk management and regulation as a partner at Ernst & Young. However, its just more of an examination standard that is catching up with what risk-managers [at securities firms] have been doing for some time, he said.
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