[14948]
July 23, 2002
TO: BROKER/DEALER ADVISORY COMMITTEE No. 22-02
COMPLIANCE ADVISORY COMMITTEE No. 52-02
SEC RULES MEMBERS No. 53-02
SMALL FUNDS MEMBERS No. 22-02
RE: TREASURY AND SEC PROPOSE CUSTOMER IDENTIFICATION PROGRAM RULE
The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and
the Securities and Exchange Commission have jointly proposed a rule on customer
identification programs (CIPs) for mutual funds.1 This rule would implement Section 326 of the
USA PATRIOT Act. The proposed rule is briefly summarized below, and a copy of the Release
is attached.
Scope of the Proposed Rule
The proposed rule would apply to all mutual funds – i.e., those entities required to
register with the SEC as investment companies and that fall within the category of “open-end
company” contained in section 5(a)(1) of the Investment Company Act of 1940. The proposed
rule would not apply to other types of investment companies, such as closed-end funds and
unit investment trusts.2 Parallel regulations governing CIPs for broker-dealers and banking
institutions are being issued separately.
Two definitions are central to determining the scope of the rule. First, the proposed rule
defines “account” to mean “any contractual or other business relationship between a customer
and a mutual fund established to effect financial transactions in securities, including the
purchase or sale of securities.” The Release explains that this definition is intended to include
all types of securities accounts maintained by mutual funds.
Second, the proposed rule defines “customer” to include (1) any mutual fund
shareholder of record who opens a new account with a mutual fund and (2) any person
1 See Financial Crimes Enforcement Network; Securities and Exchange Commission, Joint Notice of Proposed
Rulemaking, “Customer Identification Programs for Mutual Funds,” 67 Fed. Reg. 48318 (July 23, 2002) (the
“Release”).
2 The Release indicates, however, that Treasury and the SEC will continue to consider whether a CIP requirement
would be appropriate for the issuers of these products, or whether they are effectively covered by the CIP
requirements of other financial institutions involved in their distribution (e.g., broker-dealers).
2
authorized to effect transactions in the shareholder of record’s account with a mutual fund. The
rule does not apply to persons merely seeking information about a mutual fund prospectus or
profile, nor does it apply to accounts opened due to transfers not initiated by a customer (e.g., as
a result of a merger, acquisition, or purchase of assets).
CIPs and CIP Procedures
General Requirement. The proposed rule would require all mutual funds, as part of their
AML programs, to establish, document and maintain a written CIP that enables the mutual
fund to form a reasonable belief that it knows the true identity of its customers. Under the
proposed rule, the CIP would have to be approved by the fund’s board of directors or trustees.
The proposed rule would require a mutual fund’s CIP procedures to be based on the
type of identifying information available to it and on an assessment of relevant risk factors
including: (1) the mutual fund’s size; (2) the manner in which accounts are opened, fund shares
are distributed, and purchases, sales and exchanges are effected; (3) the mutual fund’s types of
accounts; and (4) the mutual fund’s customer base.
Identifying Information. The proposed rule would require mutual funds to obtain each
customer’s name, date of birth (for a natural person), addresses (both residence/principal place
of business and a mailing address, if different), and an identification number. With respect to
this last item, the proposed rule would require a taxpayer identification number for each U.S.
customer. Each non-U.S. customer would be required to provide a taxpayer identification
number, passport number and country of issuance, alien identification card number, or number
and country of issuance of any other government-issued document evidencing nationality or
residence and bearing a photograph or similar safeguard.
The Release indicates that the proposed rule merely sets forth the minimum required
information, and that mutual funds may, at times, need to consider whether to obtain
additional information.3
Verification. The proposed rule would require the CIP to include procedures for
verifying the identity of customers to the extent reasonable and practicable. Verification can
occur within a reasonable time before or after the customer’s account is opened or the customer
is granted authority to effect transactions with respect to an account. The proposed rule
provides for verification through documents and/or through non-documentary methods, and
requires CIP procedures to address both methods and describe when each would be employed.4
3 According to the Release:
The rule only specifies the minimum identifying information that must be obtained from each
customer. Mutual funds, in assessing the risk factors in paragraph (b), should determine whether
obtaining other identifying information is necessary to form a reasonable belief as to the true
identity of each customer. There may be circumstances when a mutual fund should obtain
additional identifying information. The CIP should set forth guidelines regarding what those
circumstances are and what additional information should be obtained in such circumstances.
Release at 14.
4 In fact, the Release indicates that, in light of the recent increase in identity fraud, mutual funds are encouraged to
use non-documentary methods even when a customer has provided identification documents.
3
It also specifies certain circumstances in which non-documentary methods must be used.
Examples of each method are included in the proposed rule.
The CIP would be required to specify actions to be taken if the fund cannot form a
reasonable belief that it knows the true identity of a customer, which could include closing the
account or placing limitations on additional purchases. The Release indicates that the CIP also
should include guidelines for when an account will not be opened (e.g., when the required
information is not provided), and that it should address the terms under which a customer may
conduct transactions while the customer’s identity is being verified.
The Release states that a mutual fund’s CIP does not have to include verification of the
identities of individuals whose transactions are conducted through an omnibus account, and
that the proposed rule does not require that a mutual fund obtain any additional information
regarding the identities of individual shareholders who open their accounts through an
omnibus accountholder. The Release notes, however, that the omnibus account holder is itself a
customer for purposes of the proposed rule.
Government Sponsored Lists. The proposed rule would require CIPs to include
procedures for determining whether a customer’s name appears on any list of known or
suspected terrorists or terrorist organizations prepared by any federal government agency and
made available to the mutual fund.
Notice. The proposed rule would require mutual funds to provide customers with
adequate notice that the mutual fund is requesting information to verify the customer’s identity.
Recordkeeping. The proposed rule would require CIPs to include procedures for
maintaining a record of all information obtained pursuant to the CIP. These records would
have to be retained for five years after the date the account of the customer is closed. The
Release states that nothing in the proposed rule modifies, limits or supersedes the Electronic
Records in Global and National Commerce Act (E-Sign), and thus a mutual fund may use
electronic records to satisfy the recordkeeping requirements of the proposed rule.
Exemptive Authority
The proposed rule allows the SEC, with the concurrence of the Secretary of the Treasury,
to exempt any mutual fund or type of account from the requirements of the proposed rule by
order or regulation.
Delegation of CIP Compliance
The Release notes that mutual funds typically conduct their operations through separate
entities, and that some of the elements of the CIP will best be performed by personnel of these
separate entities. Accordingly, the Release states that it is permissible a mutual fund to
contractually delegate the implementation and operation of its CIP to another affiliated or
unaffiliated service provider, such as a transfer agent. In any event, since the mutual fund
remains responsible for assuring compliance with the rule, it must actively monitor the
operation of its CIP and assess its effectiveness.
4
Specific Requests for Comments
FinCEN and the SEC have requested comment on all aspects of the proposed rule.
However, they specifically request comment on the following issues:
1. Whether the proposed definition of “account” is appropriate and whether
other examples of accounts should be added to the regulatory text;
2. How mutual funds can comply with the requirement to obtain both the
address of a person’s residence, and, if different, the person’s mailing address
in situations involving natural persons who lack a permanent address;
3. Whether non-U.S. persons that are not natural persons will be able to provide
a mutual fund with the required identifying information, or whether other
categories of identifying information should be added; and
4. The extent to which the verification procedures required by the proposed
regulation will use information that mutual funds currently obtain in the
account opening process.
Comments are due on September 6, 2002. The Institute is working with its Money
Laundering Rules Working Group and Transfer Agent Advisory Committee in developing
comments on this proposal. If you would like to participate in the working group, please
contact Amanda Busick at 202-326-5836 or abusick@ici.org.
Robert C. Grohowski
Associate Counsel
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