[Federal Register Volume 68, Number 90 (Friday, May 9, 2003)]
[Rules and Regulations]
[Pages 25131-25149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11018]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 270

[Release No. IC-26031; File No. S7-26-02]

DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA33


Customer Identification Programs for Mutual Funds

AGENCIES: Financial Crimes Enforcement Network, Treasury; Securities 
and Exchange Commission.

ACTION: Joint final rule.

-----------------------------------------------------------------------

SUMMARY: The Department of the Treasury, through the Financial Crimes 
Enforcement Network (FinCEN), and the Securities and Exchange 
Commission are jointly adopting a final rule to implement section 326 
of the Uniting and Strengthening America by Providing Appropriate Tools 
Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 
2001 (the Act). Section 326 requires the Secretary

[[Page 25132]]

of the Treasury (the Secretary or Treasury) to jointly prescribe with 
the Securities and Exchange Commission (the Commission or SEC) a 
regulation that, at a minimum, requires investment companies to 
implement procedures to verify the identity of any person seeking to 
open an account, to the extent reasonable and practicable; to maintain 
records of the information used to verify the person's identity; and to 
determine whether the person appears on any lists of known or suspected 
terrorists or terrorist organizations provided to investment companies 
by any government agency. This final regulation applies to investment 
companies that are mutual funds.

DATES: Effective Date: This rule is effective June 9, 2003.
    Compliance Date: Each mutual fund must comply with this final rule 
by October 1, 2003. Section I.D. of the SUPPLEMENTARY INFORMATION 
contains additional information concerning the compliance date for the 
final rule.

FOR FURTHER INFORMATION CONTACT:
    Securities and Exchange Commission: Division of Investment 
Management, Office of Regulatory Policy at (202) 942-0690.
    Treasury: Office of the Chief Counsel (FinCEN) at (703) 905-3590; 
Office of the General Counsel (Treasury) at (202) 622-1927; or the 
Office of the Assistant General Counsel for Banking & Finance 
(Treasury) at (202) 622-0480.

SUPPLEMENTARY INFORMATION: Treasury and the Commission are jointly 
adopting (1) a new final rule, 31 CFR 103.131, proposed in July 
2002,\1\ to implement section 326 of the USA PATRIOT Act \2\ and (2) a 
new rule 0-11 [17 CFR 270.0-11] under the Investment Company Act of 
1940 \3\ (the ``1940 Act'') that cross-references this new final rule.
---------------------------------------------------------------------------

    \1\ Customer Identification Programs for Mutual Funds, 67 FR 
48318 (July 23, 2002) (proposed rule).
    \2\ Pub. L. 107-56.
    \3\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------

I. Background

A. Section 326 of the USA PATRIOT Act

    On October 26, 2001, President Bush signed into law the USA PATRIOT 
Act. Title III of the Act, captioned ``International Money Laundering 
Abatement and Anti-terrorist Financing Act of 2001,'' adds several new 
provisions to the Bank Secrecy Act (BSA).\4\ These provisions are 
intended to facilitate the prevention, detection, and prosecution of 
international money laundering and the financing of terrorism. Section 
326 of the Act adds a new subsection (l) to 31 U.S.C. 5318 of the BSA 
that requires the Secretary to prescribe regulations ``setting forth 
the minimum standards for financial institutions and their customers 
regarding the identity of the customer that shall apply in connection 
with the opening of an account at a financial institution.''
    Section 326 applies to all ``financial institutions.'' This term is 
defined broadly in the BSA to encompass a variety of entities, 
including commercial banks, agencies and branches of foreign banks in 
the United States, thrifts, credit unions, private banks, trust 
companies, investment companies, brokers and dealers in securities, 
futures commission merchants, insurance companies, travel agents, 
pawnbrokers, dealers in precious metals, check-cashers, casinos, and 
telegraph companies, among many others.\5\ Although ``investment 
companies'' are ``financial institutions'' for purposes of the BSA,\6\ 
the BSA does not define ``investment company.'' \7\ The 1940 Act 
defines the term broadly and subjects investment companies to 
comprehensive regulation by the SEC.\8\ This final rule applies only to 
those investment companies that are ``open-end companies'' required to 
register with the SEC under section 8 of the 1940 Act.\9\ These 
entities are commonly referred to as ``mutual funds.''
---------------------------------------------------------------------------

    \4\ 31 U.S.C. 5311 et seq.
    \5\ See 31 U.S.C. 5312(a)(2) and (c)(1)(A). For any financial 
institution engaged in financial activities described in section 
4(k) of the Bank Holding Company Act of 1956, the Secretary is 
required to prescribe the regulations issued under section 326 
jointly with the Office of the Comptroller of the Currency, the 
Board of Governors of the Federal Reserve System, the Federal 
Deposit Insurance Corporation, the Office of Thrift Supervision, and 
the National Credit Union Administration (collectively, the banking 
agencies), the SEC, and the Commodity Futures Trading Commission 
(CFTC).
    \6\ See 31 U.S.C. 5312(a)(2)(I).
    \7\ Treasury has not yet adopted rules defining ``investment 
company'' for purposes of the BSA. By interim rule published on 
April 29, 2002, Treasury required that certain ``open-end 
companies,'' as that term is defined in the 1940 Act (mutual funds) 
adopt anti-money laundering programs pursuant to section 352 of the 
Act. 67 FR 21117 (Apr. 29, 2002). Treasury temporarily exempted 
investment companies other than mutual funds from the requirement 
that they establish anti-money laundering programs and temporarily 
deferred determining the definition of ``investment company'' for 
purposes of the BSA. Id. On September 26, 2002, Treasury issued a 
rule proposal that, if adopted, would require certain ``unregistered 
investment companies'' to adopt and implement anti-money laundering 
programs. 67 FR 60617 (Sept. 26, 2002). Treasury has also submitted, 
jointly with the SEC and the Board of Governors of the Federal 
Reserve System, a report to Congress recommending that customer 
identification requirements be applied to unregistered investment 
companies. See A Report to Congress in Accordance with Sec.  356(c) 
of the Uniting and Strengthening America by Providing Appropriate 
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA 
PATRIOT Act) (December 31, 2002) at 38 (available at 
www.treasury.gov/press/releases/reports/356report.pdf). We 
anticipate that this recommendation will be addressed by separate 
rulemaking.
    \8\ Section 3(a)(1) of the 1940 Act defines ``investment 
company'' as any issuer that (A) is or holds itself out as being 
engaged primarily, or proposes to engage primarily, in the business 
of investing, reinvesting, or trading in securities; (B) is engaged 
or proposes to engage in the business of issuing face-amount 
certificates of the installment type, or has been engaged in such 
business and has any such certificate outstanding; or (C) is engaged 
or proposes to engage in the business of investing, reinvesting, 
owning, holding, or trading in securities, and owns or proposes to 
acquire investment securities having a value exceeding 40 per centum 
of the value of such issuer's total assets (exclusive of Government 
securities and cash items) on an unconsolidated basis.
    \9\ See Sec.  103.131(a)(8). Section 5(a)(1) of the 1940 Act 
defines ``open-end company.'' Other types of investment companies 
regulated by the SEC include closed-end companies and unit 
investment trusts. The Secretary 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).
---------------------------------------------------------------------------

    The regulations implementing section 326 must require, at a 
minimum, financial institutions, including investment companies, to 
implement reasonable procedures for (1) verifying the identity of any 
person seeking to open an account, to the extent reasonable and 
practicable; (2) maintaining records of the information used to verify 
the person's identity, including name, address, and other identifying 
information; and (3) determining whether the person appears on any 
lists of known or suspected terrorists or terrorist organizations 
provided to the financial institution by any government agency. In 
prescribing these regulations, the Secretary is directed to take into 
consideration the types of accounts maintained by different types of 
financial institutions, the various methods of opening accounts, and 
the types of identifying information that are available.
    Final rules governing the applicability of section 326 to other 
financial institutions, including broker-dealers, banks, thrifts, 
credit unions, and futures commission merchants, are being issued 
separately.\10\ Treasury, the SEC, the CFTC and the banking agencies 
consulted extensively in the development of all rules implementing 
section 326 of the Act. These participating agencies intend the effect 
of the final rules to be uniform throughout the financial services 
industry.
---------------------------------------------------------------------------

    \10\ Treasury intends to issue separate rules under section 326 
for non-bank financial institutions that are not regulated by the 
federal functional regulators.

---------------------------------------------------------------------------

[[Page 25133]]

B. Overview of Comments Received

    On July 23, 2002, Treasury and the SEC jointly proposed a rule to 
implement section 326 with respect to mutual funds.\11\ Treasury and 
the SEC proposed general standards that would require each mutual fund 
to design and implement a customer identification program (CIP) 
tailored to the mutual fund's size, location, and type of business. The 
proposed rule also included certain specific standards that would be 
mandated for all mutual funds.
---------------------------------------------------------------------------

    \11\ Proposed rule, supra note 1. Treasury simultaneously 
published (1) jointly with the banking agencies, a proposed rule 
applicable to banks (as defined in 31 CFR 103.11(c)) and foreign 
branches of insured banks; (2) a proposed rule applicable to credit 
unions, private banks and trust companies that do not have a federal 
functional regulator; (3) jointly with the SEC, a proposed rule 
applicable to broker-dealers; and (4) jointly with the CFTC, a 
proposed rule applicable to futures commission merchants and 
introducing brokers. Customer Identification Programs for Banks, 
Savings Associations, and Credit Unions, 67 FR 48290 (July 23, 
2002); Customer Identification Programs for Certain Banks (Credit 
Unions, Private Banks and Trust Companies) That Do Not Have a 
Federal Functional Regulator, 67 FR 48299 (July 23, 2002); Customer 
Identification Programs for Broker-Dealers, 67 FR 48306 (July 23, 
2002); Customer Identification Programs for Futures Commission 
Merchants and Introducing Brokers, 67 FR 48328 (July 23, 2002). 
Treasury, the Commission, the CFTC, and the banking agencies 
received approximately five hundred comments in response to these 
proposed rules. Many of those commenters raised issues similar to 
those we received in connection with the proposal respecting mutual 
fund customer identification programs.
---------------------------------------------------------------------------

    Treasury and the SEC received eight comments in response to the 
proposal.\12\ Commenters included investment companies, a financial 
services holding company, a registered investment adviser, a transfer 
agent, trade associations, and a company engaged in the sale of 
technologies and services used to locate persons and authenticate 
identities. Commenters generally supported the proposal but suggested 
revisions.
---------------------------------------------------------------------------

    \12\ The comment letters are available for public inspection and 
copying in the SEC's Public Reference Room, 450 5th Street, NW., 
Washington, DC (File No. S7-26-02).
---------------------------------------------------------------------------

    Two commenters agreed with the largely risk-based approach set 
forth in the proposal, which allows each mutual fund to develop a CIP 
based on its specific operations, taking into consideration variables 
such as size and type of business. Five commenters suggested that the 
final rule make greater use of a risk-based approach, in lieu of 
specific identification and verification requirements. They suggested 
that such a comprehensively risk-based approach would give mutual funds 
appropriate discretion to focus efforts and resources on the high-risk 
accounts that are most likely to be used by money launderers and 
terrorists. All of the commenters recommended that the final rule 
include more specific requirements addressing the risks presented by 
particular situations.\13\ Seven of the eight commenters suggested that 
we had underestimated the burdens that would be imposed by certain 
elements of the proposal. Three commenters suggested that mutual funds 
be given greater flexibility when dealing with established customers 
and be permitted to rely on identification and verification of 
customers performed by third parties, including other funds in the same 
fund complex.
---------------------------------------------------------------------------

    \13\ For example, two commenters suggested that the rule exclude 
accounts opened by participants in qualified retirement plans or 
other qualified benefit plan customers.
---------------------------------------------------------------------------

    All of the commenters asked for additional guidance concerning one 
or more elements of the proposed rule. Six commenters requested 
guidance regarding the requirement to check government lists of known 
and suspected terrorists and terrorist organizations. Four commenters 
requested guidance concerning the proposal to require notice to 
customers that the mutual fund is requesting information to verify the 
customer's identity. Seven commenters requested that the final rule 
contain a delayed implementation date in order to provide mutual funds 
with sufficient time to design CIPs, obtain board approval, alter 
existing policies and procedures, forms, and software, and train staff.
    We have modified the proposed rule in light of these comments. The 
section-by-section analysis that follows discusses the comments and the 
modifications that we have made to the rule.

C. Codification of the Joint Final Rule

    The final rule is being issued jointly by Treasury, through FinCEN, 
and by the SEC. The substantive requirements of this joint final rule 
are being codified as part of Treasury's BSA regulations located in 31 
CFR Part 103. In addition, to provide a reference to the joint final 
rule in the SEC regulations for investment companies, the SEC is 
concurrently publishing a provision in its own regulations in 17 CFR 
Part 270 that cross-references this final rule.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 270.0-11.
---------------------------------------------------------------------------

D. Compliance Date

    Six commenters requested that mutual funds be given adequate time 
to develop and implement the requirements of any final rule 
implementing section 326. The transition periods suggested by 
commenters ranged from 90 days to 12 months after the publication of a 
final rule.
    The final rule modifies various aspects of the proposed rule and 
eliminates some of the requirements that commenters identified as being 
most burdensome. Nonetheless, we recognize that some mutual funds will 
need time to develop a CIP, obtain board approval, and implement the 
CIP, which will include various measures, such as training staff, 
reprinting forms, and developing new software. Accordingly, although 
this rule will be effective 30 days after publication, mutual funds 
will have a transition period to implement the rule. Treasury and the 
Commission have determined that each mutual fund must fully implement 
its CIP by October 1, 2003.

II. Section-by-Section Analysis

Section 131(a) Definitions

    Section 103.131(a)(1) Account. We proposed to define ``account'' as 
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.\15\ The final rule limits 
the definition of ``account'' to relationships between a person and a 
mutual fund that are established to effect transactions in securities 
issued by the mutual fund in order to clarify that the purchase or sale 
of a mutual fund's underlying portfolio securities does not establish 
an ``account'' for purposes of this rule.\16\
---------------------------------------------------------------------------

    \15\ See proposed Sec.  103.131(a)(1).
    \16\ See Sec.  103.131(a)(1)(i). Three commenters suggested that 
the definition of ``account'' be limited to formal ongoing 
relationships, as in the CIP rules proposed by Treasury and the 
banking agencies. These commenters suggested that, as proposed, the 
definition could be read to include isolated transactions where an 
account relationship with the mutual fund is not established. 
Treasury and the banking agencies proposed to limit the definition 
of ``account'' to ``ongoing transactions'' to specifically address 
situations where a person obtains certain services or products from 
a bank such as cashing or buying a check or purchasing a wire 
transfer or money order. The final rules being issued by the 
Treasury and the banking agencies do not include the term 
``ongoing'' in their definitions of ``account.'' Instead, their 
definitions of ``account'' now specifically exclude these types of 
products or services and any others where a ``formal banking 
relationship'' is not established with a person. Mutual funds do not 
offer these types of products or services to persons who are not 
fund shareholders. Thus, we did not include the term ``ongoing'' in 
the definition of account or adopt the specific exclusions included 
in the bank rules.
---------------------------------------------------------------------------

    The proposed rule stated that transfers of accounts from one mutual 
fund to another are outside the definition of ``account'' for purposes 
of

[[Page 25134]]

the proposed rule.\17\ The final rule codifies and clarifies this 
``transfer exception,'' by excluding from the definition of ``account'' 
any account that a mutual fund acquires through an acquisition, merger, 
purchase of assets, or assumption of liabilities from any third party. 
Because these transfers are not initiated by customers, the accounts do 
not fall within the scope of section 326.\18\ Finally, the rule 
excludes from the definition of ``account'' accounts opened for the 
purpose of participating in an employee benefit plan established 
pursuant to the Employee Retirement Income Security Act of 1974.\19\ 
Two commenters recommended that these accounts be excluded from the 
rule. We believe that these accounts are less susceptible to use for 
the financing of terrorism and money laundering, because, among other 
reasons, they are funded through payroll deductions in connection with 
employment plans that must comply with federal regulations that impose 
various requirements regarding the funding and withdrawal of funds from 
such accounts, including low contribution limits and strict 
distribution requirements. Therefore, we have decided to exclude them 
from the definition of ``account'' in the final rule.
---------------------------------------------------------------------------

    \17\ See proposed rule, supra note 1, Section I.A.
    \18\ Section 326 of the Act provides that the regulations 
thereunder shall require financial institutions to implement 
reasonable procedures for ``verifying the identity of any person 
seeking to open an account.'' (emphasis added) If a financial 
institution acquires a pre-existing account, the customer is not 
opening an account with the financial institution. Nevertheless, 
there may be situations involving the transfer of accounts where it 
would be appropriate for a mutual fund to verify the identity of 
customers associated with the accounts that it acquires from another 
financial institution. We expect financial institutions to implement 
reasonable procedures to detect money laundering in any accounts, 
however acquired. A mutual fund may, as part of its AML compliance 
program, need to take additional steps to verify the identity of 
customers, based on its assessment of the relevant risks.
    \19\ Section 103.131(a)(1)(ii)(B).
---------------------------------------------------------------------------

    Section 103.131(a)(2) Customer. We proposed to define ``customer'' 
to mean any mutual fund shareholder of record who opens a new account 
with a mutual fund, and any person authorized to effect transactions in 
the shareholder of record's account.\20\ The proposed rule described 
various relationships that would be included in, or excluded from, the 
definition of ``customer.'' \21\ Seven commenters expressed concern 
about the proposed definition. Three commenters recommended that the 
final rule provide that persons who do not actually establish an 
account or receive services from a mutual fund are not ``customers.'' 
One commenter recommended that the rule define ``customer'' as a person 
who opens a new account, and explicitly exclude existing customers. Two 
commenters suggested that a person who exchanges fund shares within a 
fund family be excluded, whether or not the exchange occurred in a 
single account.
---------------------------------------------------------------------------

    \20\ Proposed Sec.  103.131(a)(3).
    \21\ See proposed rule, supra note 1, Section II.A.
---------------------------------------------------------------------------

    We have revised the definition of ``customer'' to address these and 
other issues. The final rule defines ``customer'' as ``a person that 
opens a new account.'' \22\ For example, in the case of a trust 
account, the ``customer'' would be the trust. For purposes of this 
rule, a mutual fund is not required to look through a trust, or similar 
account to verify the identities of beneficiaries, and instead is 
required only to verify the identity of the named accountholder.\23\ 
Similarly, with respect to an omnibus account established by an 
intermediary, a mutual fund generally is not required to look through 
the intermediary to the underlying beneficial owners.\24\
---------------------------------------------------------------------------

    \22\ Section 103.131(a)(2)(i). Each person named on a joint 
account is a ``customer'' under this final rule unless otherwise 
provided.
    \23\ However, based on its risk assessment of a new account 
opened by a customer that is not an individual, a mutual fund may 
need to take additional steps to verify the identity of the customer 
by seeking information about individuals with ownership or control 
over the account in order to identify the customer, as described in 
Sec.  103.121(b)(2)(ii)(C). See notes 82-84 infra and accompanying 
text, discussing procedures for additional verification for certain 
customers. A mutual fund may, as a part of its AML compliance 
program, need to take additional steps to verify the identity of 
customers, based on its assessment of the relevant risks.
    \24\ See also note 47 infra and accompanying text, discussing 
omnibus accounts.
---------------------------------------------------------------------------

    The final rule clarifies the treatment of a minor child or an 
informal group with a common interest (e.g., a civic club), where there 
is no legal entity. In those circumstances, ``customer'' includes ``an 
individual who opens a new account for (1) an individual who lacks 
legal capacity, such as a minor; or (2) an entity that is not a legal 
person, such as a civic club.''\25\
---------------------------------------------------------------------------

    \25\ Section 103.131(a)(2)(i)(B).
---------------------------------------------------------------------------

    In order to make the rule less burdensome, the final rule excludes 
from the definition of ``customer'' certain readily identifiable 
entities, including: (1) Financial institutions regulated by a federal 
functional regulator; (2) banks regulated by a state bank regulator; 
and (3) governmental agencies and instrumentalities and companies that 
are publicly traded (i.e., the entities described in Sec.  
103.22(d)(2)(ii)-(iv)).\26\ Finally, the definition of ``customer'' 
excludes a person that has an existing account with a mutual fund, 
provided that the mutual fund has a reasonable belief that it knows the 
true identity of the person.\27\
---------------------------------------------------------------------------

    \26\ Section 103.131(a)(2)(ii)(A)-(B). Section 103.22(d)(2)(ii)-
(iv) exempts such companies only to the extent of their domestic 
operations. Accordingly, a mutual fund's CIP will apply to any 
foreign offices, affiliates, or subsidiaries of such entities that 
open new accounts.
    \27\ Section 103.131(a)(2)(ii)(C). Although a customer of one 
mutual fund would not necessarily be considered an existing customer 
of other funds in the same fund complex, one fund may rely on 
another fund's performance of any elements of its CIP. See 
discussion at notes 115-122 and accompanying text, infra describing 
circumstances in which a fund may rely on the performance of all or 
part of its CIP by another financial institution, including another 
fund in the fund complex.
---------------------------------------------------------------------------

    Five commenters objected to the proposal to define ``customer'' to 
include all persons with authority to effect transactions in the 
account of a shareholder of record.\28\ While acknowledging that there 
are circumstances in which it would be appropriate to verify the 
identity of all such persons (e.g., accountholders that are small or 
closely held corporations), they asserted that the proposal in this 
respect was overbroad and unduly burdensome, and would not further the 
goals of the statute. In light of these comments, we have revisited the 
issue and have determined that requiring a mutual fund to verify the 
identity of all such parties could interfere with the mutual fund's 
ability to focus on identifying customers that present a significant 
risk of not being properly identified. Accordingly, the final rule does 
not define ``customer'' to include persons authorized to effect 
transactions in the account of a shareholder of record. Rather, a 
mutual fund's CIP must address situations in which the mutual fund will 
take additional steps to verify the identity of a customer that is not 
an individual (such as a corporation or partnership) by seeking 
information about individuals with authority or control over the 
account, including persons with authority to effect transactions in the 
account.\29\
---------------------------------------------------------------------------

    \28\ Proposed Sec.  103.131(a)(3)(ii).
    \29\ Section 103.131(b)(2)(ii)(C). See discussion at notes 82-84 
and accompanying text, infra.
---------------------------------------------------------------------------

    Section 103.131(a)(3) Federal functional regulator. The proposed 
rule did not define ``federal functional regulator.'' The final rule 
uses the term in several provisions, including the provisions 
concerning government lists and reliance on other financial 
institutions. The final rule defines the term by reference to Sec.  
103.120(a)(2), meaning each of the banking agencies, the SEC, and the 
CFTC.
    Section 103.131(a)(4) Financial institution. The proposed rule did 
not define ``financial institution.'' The final rule uses the term in 
several provisions,

[[Page 25135]]

including the definition of ``customer'' and the provisions on 
verification through non-documentary methods, notices, and reliance on 
other financial institutions. Therefore, the final rule defines the 
term by cross-reference to the BSA.\30\
---------------------------------------------------------------------------

    \30\ Section 103.131(a)(4), referring to 31 U.S.C. 5312(a)(2) 
and (c)(1). This definition is more expansive than the definition of 
``financial institution'' in 31 CFR 103.11, and includes entities 
such as futures commission merchants and introducing brokers.
---------------------------------------------------------------------------

    Section 103.131(a)(5) Mutual fund. We proposed to define ``mutual 
fund'' as an ``investment company'' that is an ``open-end company'' (as 
those terms are defined in the 1940 Act).\31\ We have revised the 
definition to limit it to entities that are registered or are required 
to register with the SEC under section 8 of the 1940 Act.\32\ This 
change clarifies that the rule does not apply to foreign mutual funds 
that meet the statutory definition but are not subject to the 
registration requirements of the 1940 Act.
---------------------------------------------------------------------------

    \31\ Proposed Sec.  103.131(a)(4).
    \32\ Section 103.131(a)(5).
---------------------------------------------------------------------------

    Section 103.131(a)(6) Non-U.S. person. We proposed to define ``non-
U.S. person'' as a person that is not a U.S. person.\33\ There were no 
comments on this definition and we are adopting it as proposed.
    Section 103.131(a)(7) Taxpayer identification number. We proposed 
to define ``taxpayer identification number'' by reference to section 
6109 of the Internal Revenue Code and the regulations of the Internal 
Revenue Service.\34\ There were no comments on this approach and we are 
adopting it substantially as proposed, with minor technical 
modifications.
---------------------------------------------------------------------------

    \33\ Proposed Sec.  103.131(a)(8).
    \34\ Proposed Sec.  103.131(a)(6).
---------------------------------------------------------------------------

    Section 103.131(a)(8) U.S. person. We proposed to define ``U.S. 
person'' as a U.S. citizen, or a corporation, partnership, trust, or 
person (other than a natural person) established or organized under the 
laws of a State or the United States.\35\ There were no comments on 
this definition and we are adopting it substantially as proposed, with 
technical changes that conform the definition to that used in the final 
CIP rules for other financial institutions.
---------------------------------------------------------------------------

    \35\ Proposed Sec.  103.131(a)(7).
---------------------------------------------------------------------------

Section 103.131(b) Customer Identification Program: Minimum 
Requirements

    Section 103.131(b)(1) General Rule. We proposed to require that 
each mutual fund establish, document, and maintain a written CIP as 
part of its required anti-money laundering (AML) program, and that the 
procedures of the CIP enable the fund to form a reasonable belief that 
it knows the true identity of a customer.\36\ The mutual fund's CIP 
procedures were to be based on the type of identifying information 
available 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.\37\ The proposed rule discussed these risk 
factors and explained that, although the rule requires certain minimum 
identifying information and suitable verification methods, mutual funds 
should consider on an ongoing basis whether other information or 
methods are appropriate, particularly as they become available in the 
future.\38\ Commenters generally supported the approach of the proposed 
general CIP requirements and we are adopting them substantially as 
proposed, although the final rule reorganizes the provisions of the CIP 
requirements section.\39\
---------------------------------------------------------------------------

    \36\ Proposed Sec.  103.131(b). 31 CFR 103.130 requires mutual 
funds to develop and implement AML programs.
    \37\ Id.
    \38\ Proposed rule, supra note 1, Section II.B.
    \39\ In the final rule, Sec.  103.131(b)(1) specifies the 
general requirement that a mutual fund adopt a written CIP 
appropriate for its size and type of business, and that the CIP must 
be a part of the mutual fund's AML program under 31 CFR 103.130. The 
discussion of the factors to be considered in implementing a CIP now 
is in Sec.  103.131(b)(2).
---------------------------------------------------------------------------

    The proposed rule would have required a mutual fund's CIP to be 
approved by the fund's board of directors or trustees.\40\ Four 
commenters requested clarification that the provision would not require 
ongoing review or monitoring by the board. One commenter observed that 
fund AML programs must already be approved by the board, and suggested 
that it would be redundant to require that the CIP, which is part of 
the fund's AML program, be separately approved.\41\ In order to 
eliminate any duplicative requirements we are eliminating the board 
approval requirement from the final rule. We note, however, that a fund 
with an AML program that the board has approved as required, must 
nonetheless obtain board approval of a new CIP. The addition of the CIP 
is a material change that must be approved by the board.
---------------------------------------------------------------------------

    \40\ Proposed Sec.  103.131(i).
    \41\ See 31 CFR 103.130(b) (requiring that each mutual fund's 
AML program be approved in writing by its board of directors or 
trustees).
---------------------------------------------------------------------------

    Section 103.131(b)(2) Identity verification procedures. We proposed 
to require that a mutual fund's CIP include procedures for verifying 
the identity of customers, to the extent reasonable and practicable, 
using information specified in the rule, and that such verification 
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.\42\ Commenters supported these general 
requirements, although five commenters recommended greater use of a 
risk-based approach.
---------------------------------------------------------------------------

    \42\ Proposed Sec.  103.131(d).
---------------------------------------------------------------------------

    The final rule continues to strike a balance between flexibility 
and detailed guidance, and we are adopting the provisions on identity 
verification procedures substantially as proposed. Under the final 
rule, a mutual fund's CIP must include risk-based procedures for 
verifying the identity of each customer to the extent reasonable and 
practicable.\43\ Such procedures must enable the mutual fund to form a 
reasonable belief that it knows the true identity of each customer.\44\ 
The procedures must be based on the mutual fund's assessment of the 
relevant risks, including those presented by the manner in which 
accounts are opened, fund shares are distributed, and purchases, sales 
and exchanges are effected, the various types of accounts maintained by 
the mutual fund, the various types of identifying information 
available, and the mutual fund's customer base.\45\ As noted in the 
proposed rule, a mutual fund's CIP need not include procedures for 
verifying identities of persons whose transactions are conducted 
through an omnibus account.\46\ The holder of the omnibus account 
(e.g., a broker-dealer) is considered to be the customer for purposes 
of this rule.\47\
---------------------------------------------------------------------------

    \43\ Section 103.131(b)(2). Other elements of the fund's CIP, 
such as procedures for recordkeeping or checking of government 
lists, are requirements that may not vary depending on risk factors.
    \44\ Id.
    \45\ Id.
    \46\ Proposed rule, supra note 1, Section II.B.
    \47\ See note 24 supra and accompanying text. This treatment of 
omnibus accounts is consistent with the legislative history of the 
Act, which includes the following: ``[W]here a mutual fund sells its 
shares to the public through a broker-dealer and maintains a 
``street name'' or omnibus account in the broker-dealer's name, the 
individual purchasers of the fund shares are customers of the 
broker-dealer, rather than the mutual fund. The mutual fund would 
not be required to ``look through'' the broker-dealer to identify 
and verify the identities of those customers. Similarly, where a 
mutual fund sells its shares to a qualified retirement plan, the 
plan, and not its participants, would be the fund's customers. Thus 
the fund would not be required to ``look through'' the plan to 
identify its participants.'' H.R. Rep. 107-250, pt. 1, at 62 (2001).

---------------------------------------------------------------------------

[[Page 25136]]

Section 103.131(b)(2)(i) Customer Information Required

    The proposed rule would have required a mutual fund's CIP to 
require the fund to obtain certain identifying information about each 
customer, including, at a minimum: (1) Names; (2) dates of birth, for 
natural persons; (3) certain addresses;\48\ and (4) certain 
identification numbers.\49\ The proposed rule further stated that in 
certain circumstances a mutual fund should obtain additional 
identifying information, and that the CIP should set forth guidelines 
regarding those circumstances and the additional information that 
should be obtained.\50\
---------------------------------------------------------------------------

    \48\ Proposed Sec.  103.131(c)(1)(iii). We proposed to require 
funds to obtain residence and mailing addresses (if different) for a 
natural person, or principal place of business and mailing address 
(if different) for a person other than a natural person.
    \49\ Proposed Sec.  103.131(c)(1)(iv). We proposed to require 
funds to obtain: (1) for a customer that is a U.S. person, a 
taxpayer identification number, or (2) for a customer that is not a 
U.S. person, 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.
    \50\ Proposed rule, supra note 1, Section II.C.
---------------------------------------------------------------------------

    Commenters expressed some concerns about this aspect of the 
proposal. Two commenters objected to the proposed requirement to obtain 
more than one address from a customer. Two commenters pointed out that 
a non-U.S. person may not have any of the specified identification 
numbers. One commenter recommended that the rule permit a mutual fund 
to obtain the foreign equivalent of a taxpayer identification number 
from non-U.S. persons, or a number and country of issuance of any 
government-issued document evidencing nationality or residence, without 
the requirement of a photograph or similar safeguard, from non-U.S. 
entities. Two commenters argued that the final rule should provide 
financial institutions with flexibility to determine what information 
to obtain, using a risk-based approach.
    We are adopting the customer information provisions substantially 
as proposed, with changes to accommodate individuals who may not have 
physical addresses. Prior to opening an account, a mutual fund must 
obtain, at a minimum, a customer's (1) name; (2) date of birth, for an 
individual; (3) address; and (4) identification number.\51\ The address 
must be (1) for an individual, a residential or business street 
address, or for an individual who does not have a residential or 
business street address, an Army Post Office or Fleet Post Office box 
number, or the residential or business street address of next of kin or 
another contact individual; or (2) for a person other than an 
individual, a principal place of business, local office or other 
physical location.\52\
---------------------------------------------------------------------------

    \51\ Section 103.131(b)(2)(i)(A).
    \52\ Section 103.131(b)(2)(i)(A)(3).
---------------------------------------------------------------------------

    We are adopting the identification number requirement substantially 
as proposed. For a customer that is a U.S. person, the identification 
number is a taxpayer identification number (social security number, 
individual taxpayer identification number, or employer identification 
number). For a customer that is not a U.S. person, the identification 
number is one or more of the following: 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.\53\ This provision provides a mutual 
fund with some flexibility to choose among a variety of identification 
numbers that it may accept from a non-U.S. person.\54\ However, the 
identifying information the mutual fund accepts must permit the fund to 
establish a reasonable belief that it knows the identity of the 
customer.\55\
---------------------------------------------------------------------------

    \53\ Section 103.131(b)(2)(i)(A)(4).
    \54\ The rule provides this flexibility because there is no 
uniform identification number that non-U.S. persons would be able to 
provide to a mutual fund. See Treasury Department, ``A Report to 
Congress in Accordance with Section 326(b) of the USA PATRIOT Act,'' 
October 21, 2002.
    \55\ We emphasize that the rule neither endorses nor prohibits a 
mutual fund from accepting information from particular types of 
identification documents issued by foreign governments. The mutual 
fund must determine, based upon appropriate risk factors, including 
those discussed above, whether the information presented by a 
customer is reliable. We recognize that a foreign business or 
enterprise may not have a taxpayer identification number or any 
other number from a government-issued document evidencing 
nationality or residence and bearing a photograph or similar 
safeguard. Therefore the final rule notes that when opening an 
account for such a customer, the mutual fund must request 
alternative government-issued documentation certifying the existence 
of the business or enterprise.
---------------------------------------------------------------------------

    The proposed rule included an exception from the requirement to 
obtain a taxpayer identification number from a customer opening a new 
account. The exception would have allowed a mutual fund to open an 
account for a person that has applied for, but has not yet received, an 
employer identification number (EIN).\56\ We are adopting an expanded 
version of this exception in the final rule. As proposed, the exception 
was limited to persons that are not natural persons.\57\ On further 
consideration, we have determined that it is appropriate to expand the 
exception to include natural persons who have applied for, but have not 
received, a taxpayer identification number.\58\ We have also modified 
the exception to reduce the recordkeeping burden for mutual funds. The 
proposed rule would have required the mutual fund to retain a copy of 
the customer's application for a taxpayer identification number. The 
final rule permits the fund to exercise discretion to determine how to 
confirm that a customer has filed an application.\59\
---------------------------------------------------------------------------

    \56\ Proposed Sec.  103.131(c)(2). This position is analogous to 
that in regulations issued by the Internal Revenue Service (IRS) 
concerning ``awaiting-TIN [taxpayer identification number] 
certificates.'' The IRS permits a taxpayer to furnish an ``awaiting-
TIN certificate'' in lieu of a taxpayer identification number to 
exempt the taxpayer from the withholding of taxes owed on reportable 
payments (i.e. interest and dividends) on certain accounts. See 26 
CFR 31.3406(g)-3.
    \57\ In the proposed rule, we explained that the exception was 
for businesses that may need to open a mutual fund account before 
they receive an EIN from the Internal Revenue Service. Proposed 
rule, supra note 1, Section II.C.
    \58\ Section 103.131(b)(2)(i)(B).
    \59\ The mutual fund's CIP must include procedures to confirm 
that the application was filed before the person opens the account 
and obtain the taxpayer identification number within a reasonable 
period of time after the account is opened. Section 
103.131(b)(2)(i)(B).
---------------------------------------------------------------------------

Section 103.131(b)(2)(ii) Customer Verification

    We proposed to require that a mutual fund's CIP include procedures 
for verifying the identity of customers, to the extent reasonable and 
practicable, using the information obtained under the rule.\60\ We also 
proposed to require such verification to 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.\61\ The proposed rule stated that a mutual fund need not 
verify each piece of identifying information if it is able to form a 
reasonable belief that it knows the customer's identity after verifying 
only certain of the information.\62\ The proposed rule also stated that 
the flexibility to undertake verification within a reasonable time must 
be exercised in a reasonable manner, that verifications too far in 
advance may become stale and verifications too long after the fact may 
provide opportunities to launder money while verification is pending, 
and that the appropriate amount of time may depend on the type of 
account opened, whether the customer opens the account

[[Page 25137]]

in person, and the type of identifying information available.\63\
---------------------------------------------------------------------------

    \60\ Proposed Sec.  103.131(d).
    \61\ Id.
    \62\ Proposed rule, supra note 1, Section II.D.
    \63\ Id.
---------------------------------------------------------------------------

    The final rule adopts the customer verification requirements 
substantially as proposed, with modifications that conform this 
provision of the final rule to the revised definition of ``customer,'' 
described above. The final rule requires that the CIP contain 
procedures for verifying the identity of the customer, using the 
customer information obtained in accordance with paragraph (b)(2)(i), 
within a reasonable time after the account is opened.\64\ The final 
rule does not require verification if a person is granted authority to 
effect transactions with respect to an account. As stated in the 
proposed rule, mutual funds must exercise in a reasonable manner the 
flexibility to undertake verification within a reasonable time. The 
amount of time may depend on various factors, such as the type of 
account opened, whether the customer opens the account in-person, and 
the type of identifying information that is available.\65\
---------------------------------------------------------------------------

    \64\ Section 103.131(b)(2)(ii).
    \65\ It is possible, however, that a mutual fund would violate 
other laws by permitting a customer to transact business prior to 
verifying the customer's identity. See, e.g., 31 CFR part 500 
(regulations of Treasury's Office of Foreign Asset Control 
prohibiting transactions involving designated foreign countries or 
their nationals).
---------------------------------------------------------------------------

    The final rule also requires that a mutual fund's CIP include 
procedures that describe when the fund will use documents, non-
documentary methods, or a combination of both to verify customer 
identities.\66\ Depending on the type of customer and the method of 
opening an account, it may be more appropriate to use either 
documentary or non-documentary methods, and in some cases it may be 
appropriate to use both methods. The CIP should set forth guidelines 
describing when documents, non-documentary methods, or a combination of 
both will be used. These guidelines should be based on the mutual 
fund's assessment of the relevant risk factors.\67\
---------------------------------------------------------------------------

    \66\ Id. In the proposed rule, this language was in the 
provisions on verification through documents and non-documentary 
methods. Proposed Sec.  103.131(d)(1) and (2).
    \67\ Section 103.131(b)(2) describes these risk factors.
---------------------------------------------------------------------------

Section 103.131(b)(2)(ii)(A) Customer Verification--Through Documents

    We proposed to require that a mutual fund's CIP describe documents 
that the fund will use to verify customers' identities. Suitable 
documents for verification would include: (1) For natural persons, 
unexpired government-issued identification evidencing nationality or 
residence and bearing a photograph or similar safeguard; and (2) for 
persons other than natural persons, documents showing the existence of 
the entity, such as registered articles of incorporation, a government-
issued business license, partnership agreement, or trust 
instrument.\68\
---------------------------------------------------------------------------

    \68\ Proposed Sec.  103.131(d)(1).
---------------------------------------------------------------------------

    Three commenters noted problems with the use of documents to verify 
customers' identities. Two commenters stated that it is impossible to 
obtain objective verification that documents are authentic, complete or 
current. One commenter pointed out that some states do not require 
documentation of certain legal entities, and that, as a result, there 
may be no documentary evidence of such entities. One commenter stated 
that documents, even government-issued identification cards, are 
inadequate as a sole means of verification, and recommended that the 
rule require a mutual fund also to obtain information about customers 
from unrelated sources. The final rule attempts to strike an 
appropriate balance between the benefits of requiring additional 
documentary verification and the burdens that may arise from such a 
requirement. The final rule requires a mutual fund's CIP to contain 
procedures that set forth the documents that the mutual fund will use 
for verification.\69\ Each mutual fund will conduct its own risk-based 
analysis of the types of documents that it believes will enable it to 
verify customer identities, given the risk factors that are relevant to 
the mutual fund.\70\
---------------------------------------------------------------------------

    \69\ Section 103.131(b)(2)(ii)(A).
    \70\ Once a mutual fund obtains and verifies the identity of a 
customer through a document, such as a driver's license or passport, 
the fund is not required to take steps to determine whether the 
document has been validly issued. A fund generally may rely on 
government issued identification as verification of a customer's 
identity; however, if a document shows obvious indications of fraud, 
the fund must consider that factor in determining whether it can 
form a reasonable belief that it knows the customer's true identity.
---------------------------------------------------------------------------

    In light of recent increases in identity theft and the availability 
of fraudulent documents, we believe that the value of documentary 
verification is enhanced by redundancy. The rule gives examples of 
types of documents that are considered reliable. However, we encourage 
mutual funds to obtain more than one type of documentary verification 
to ensure that it has a reasonable belief that it knows the customer's 
true identity. Moreover, we encourage mutual funds to use a variety of 
methods to verify the identity of a customer, especially when the 
mutual fund does not have the ability to examine original documents.
    The final rule continues to include, without significant change, an 
illustrative list of identification documents.\71\ A mutual fund may 
use other documents, provided that they allow the fund to establish a 
reasonable belief that it knows the true identity of the customer. In 
addition to the risk factors described in paragraph (b)(2), the mutual 
fund should take into account the problems of authenticating documents 
and the inherent limitations of documents as a means of identity 
verification. These limitations will affect the types of documents that 
will be necessary to establish a reasonable belief that the fund knows 
the true identity of the customer, and may require the use of non-
documentary methods in addition to documents.
---------------------------------------------------------------------------

    \71\ For an individual, these documents may include unexpired 
government-issued identification evidencing nationality or residence 
and bearing a photograph or similar safeguard, such as a driver's 
license or passport. Sec.  103.131(b)(2)(ii)(A)(1). For a person 
other than an individual, these documents may include documents 
showing the existence of the entity, such as certified articles of 
incorporation, a government-issued business license, a partnership 
agreement, or trust instrument. Sec.  103.131(b)(2)(ii)(A)(2).
---------------------------------------------------------------------------

Section 103.131(b)(2)(ii)(B) Customer Verification--Through Non-
Documentary Methods

    Recognizing that some accounts are opened by telephone, by mail and 
over the Internet, we proposed to require a mutual fund's CIP to 
describe what non-documentary methods the fund would use to verify 
customers' identities and when the fund would use these methods in 
addition to, or instead of, relying on documents.\72\ We explained that 
the proposed rule allowed the exclusive use of non-documentary methods 
because some accounts are opened by telephone, mail, or over the 
Internet.\73\ We also noted that even if the customer presents 
identification documents, it may be appropriate to use non-documentary 
methods as well.\74\
---------------------------------------------------------------------------

    \72\ Proposed Sec.  103.131(d)(2).
    \73\ Proposed rule, supra note 1, Section II.D.2.
    \74\ Id.
---------------------------------------------------------------------------

    The proposed rule provided examples of non-documentary verification 
methods that a mutual fund may use, including: Contacting a customer; 
independently verifying information through credit bureaus, public 
databases, and other sources; and checking references with other 
financial institutions.\75\ In the proposed rule we observed that 
mutual funds may wish to analyze whether there is logical consistency 
between the identifying information provided, such as the customer's 
name, street address, ZIP

[[Page 25138]]

code, telephone number (if provided), date of birth, and social 
security number.\76\
---------------------------------------------------------------------------

    \75\ Proposed Sec.  103.131(d)(2).
    \76\ Proposed rule, supra note , Section II.D.2.
---------------------------------------------------------------------------

    We proposed to require mutual funds to use non-documentary methods 
when: (1) A customer who is a natural person cannot present an 
unexpired, government-issued identification document that bears a 
photograph or similar safeguard; (2) the mutual fund is presented with 
unfamiliar documents to verify the identity of a customer; or (3) the 
mutual fund does not obtain documents to verify the identity of a 
customer, does not meet face-to-face with a customer who is a natural 
person, or is otherwise presented with circumstances that increase the 
risk the mutual fund will be unable to verify the true identity of a 
customer through documents.\77\ In the proposed rule we explained that 
we recognize that identification documents may be obtained illegally 
and may be fraudulent.\78\ In light of the recent increase in identity 
theft, we encouraged mutual funds to use non-documentary methods even 
when the customer has provided identification documents.\79\
---------------------------------------------------------------------------

    \77\ Proposed Sec.  103.131(d)(2).
    \78\ Proposed rule, supra note 1, Section II.D.2.
    \79\ Id.
---------------------------------------------------------------------------

    One commenter requested that we clarify that account applicants who 
are not physically present at an account opening may be treated under 
the mutual fund's non-documentary verification methods. Another 
commenter suggested that the proposed non-documentary methods of 
verification would be ineffective for foreign individuals, and 
therefore could preclude foreign individuals who are not physically 
present in the United States from investing in mutual funds.
    We recognize that there are many scenarios and combinations of risk 
factors that mutual funds may encounter, and we have decided to adopt 
general principles that are illustrated by examples, in lieu of a 
lengthy and possibly unwieldy regulation that attempts to address a 
wide variety of situations with particularity. Under the final rule, 
for a mutual fund relying on non-documentary verification methods, the 
CIP must contain procedures that describe non-documentary methods the 
mutual fund will use. The final rule includes an illustrative list of 
methods, similar to the list that was included in the proposed rule. 
These methods may include: (1) Contacting a customer; (2) independently 
verifying the customer's identity through the comparison of information 
provided by the customer with information obtained from a consumer 
reporting agency, public database, or other source; (3) checking 
references with other financial institutions; and (4) obtaining a 
financial statement.\80\ As we stated in the proposed rule, we 
recommend that mutual funds analyze whether there is logical 
consistency between the identifying information provided, such as the 
customer's name, street address, ZIP code, telephone number (if 
provided), date of birth, and social security number.
---------------------------------------------------------------------------

    \80\ Section 103.131(b)(2)(ii)(B)(1).
---------------------------------------------------------------------------

    The final rule also includes a list, similar to that in the 
proposal, of circumstances that may require the use of non-documentary 
procedures. The final rule requires that non-documentary procedures 
address circumstances in which: (1) An individual is unable to present 
an unexpired government-issued identification document that bears a 
photograph or similar safeguard; (2) the mutual fund is not familiar 
with the documents presented; (3) the account is opened without 
obtaining documents; (4) the customer opens the account without 
appearing in person; and (5) the circumstances increase the risk that 
the mutual fund will be unable to verify the true identity of a 
customer through documents.\81\
---------------------------------------------------------------------------

    \81\ Section 103.131(b)(2)(ii)(B)(2). The final clause 
acknowledges that there may be circumstances, beyond those 
specifically described in this provision, when a mutual fund should 
use non-documentary verification procedures.
---------------------------------------------------------------------------

    As we stated in the proposed rule, because identification documents 
may be obtained illegally and may be fraudulent, and in light of the 
recent increase in identity theft, we encourage mutual funds to use 
non-documentary methods even when the customer has provided 
identification documents.

Section 103.131(b)(2)(ii)(C) Customer Verification--Additional 
Verification for Certain Customers

    As described above, we proposed to require verification of the 
identity of any person authorized to effect transactions in a 
shareholder's account with a mutual fund. Most commenters objected to 
this requirement, and it does not appear in the final rule.\82\ For the 
reasons discussed below, however, the rule does require that a mutual 
fund's CIP address the circumstances in which it will obtain 
information about such individuals in order to verify the customer's 
identity. Treasury and the SEC believe that while mutual funds may be 
able to verify the majority of customers adequately through the 
documentary or non-documentary verification methods described above, 
there may be circumstances when these methods are inadequate. The risk 
that the mutual fund will not know the customer's true identity may be 
heightened for certain types of accounts, such as an account opened in 
the name of a corporation, partnership, or trust that is created or 
conducts substantial business in a jurisdiction that has been 
designated by the United States as a primary money laundering concern 
or has been designated as non-cooperative by an international body. We 
believe that a mutual fund must identify customers that pose a 
heightened risk of not being properly identified and that a mutual 
fund's CIP must prescribe additional measures that may be used to 
obtain information about the identity of the individuals associated 
with the customer, when standard documentary or non-documentary methods 
prove to be insufficient.
---------------------------------------------------------------------------

    \82\ See supra notes 28-29, and accompanying text.
---------------------------------------------------------------------------

    The final rule, therefore, includes a new provision on verification 
procedures.\83\ This provision requires that the CIP address 
circumstances in which, based on the mutual fund's risk assessment of a 
new account opened by a customer that is not an individual, the mutual 
fund also will obtain information about individuals with authority or 
control over the account, including persons authorized to effect 
transactions in the shareholder's account, in order to verify the 
customer's identity.\84\ This additional verification method will apply 
only when the mutual fund cannot adequately verify the customer's 
identity using the documentary and non-documentary verification 
methods.\85\
---------------------------------------------------------------------------

    \83\ Section 103.131(b)(2)(ii)(C).
    \84\ Id.
    \85\ Id. A mutual fund need not undertake any additional 
verification if it chooses not to open an account when it cannot 
verify the customer's true identity using standard documentary and 
non-documentary verification methods.
---------------------------------------------------------------------------

Section 103.131(b)(2)(iii) Lack of Verification

    We proposed to require that a mutual fund's CIP include procedures 
for responding to circumstances in which the fund cannot form a 
reasonable belief that it knows the true identity of the customer.\86\ 
We explained in the proposed rule that the CIP should specify the 
actions to be taken, which could include closing the account or placing 
limitations on additional purchases.\87\ We also explained that

[[Page 25139]]

there should be guidelines for when an account will not be opened 
(e.g., when the required information is not provided), and that the CIP 
should address the terms under which a customer may conduct 
transactions while the customer's identity is being verified.\88\
---------------------------------------------------------------------------

    \86\ Proposed Sec.  103.131(g).
    \87\ See proposed rule, supra note 1, at section II.G.
    \88\ Id.
---------------------------------------------------------------------------

    The final rule adopts this provision substantially as proposed, and 
adds a description of recommended features of these procedures, based 
on the features described in the proposed rule.\89\ The final rule 
states that the procedures should describe: (1) When the mutual fund 
should not open an account; (2) the terms under which a customer may 
use an account while the mutual fund attempts to verify the customer's 
identity; (3) when the mutual fund should file a Suspicious Activity 
Report (SAR) in accordance with applicable law; \90\ and (4) when the 
mutual fund should close an account, after attempts to verify a 
customer's identity have failed.\91\
---------------------------------------------------------------------------

    \89\ Sec.  103.131(b)(2)(iii).
    \90\ Although mutual funds are not currently required to file 
SARs, they are encouraged to do so voluntarily. On January 21, 2003, 
Treasury proposed new rule 31 CFR 103.15 which, if adopted, will 
require mutual funds to file SARs in certain circumstances. 68 FR 
2716 (Jan. 21, 2003).
    \91\ Section 103.131(b)(2)(iii)(A)-(D).
---------------------------------------------------------------------------

Section 103.131(b)(3) Recordkeeping

    Section 103.131(b)(3)(i) Required Records. We proposed to require 
mutual fund CIPs to include certain recordkeeping procedures.\92\ 
First, the proposed rule would have required that a mutual fund 
maintain a record of the identifying information provided by 
customers.\93\ Second, if a mutual fund relies on a document to verify 
a customer's identity, the proposed rule would have required the mutual 
fund to maintain a copy of the document.\94\ Third, the proposed rule 
would have required mutual funds to record the methods and results of 
any additional measures undertaken to verify the identity of 
customers.\95\ Finally, the proposed rule would have required mutual 
funds to record the resolution of any discrepancy in the identifying 
information obtained.\96\
---------------------------------------------------------------------------

    \92\ Proposed Sec.  103.131(h).
    \93\ Proposed Sec.  103.131(h)(1).
    \94\ Id.
    \95\ Proposed Sec.  103.131(h)(2).
    \96\ Proposed Sec.  103.131(h)(3).
---------------------------------------------------------------------------

    Six commenters expressed concern that the recordkeeping 
requirements as proposed were unduly burdensome. Two commenters 
recommended that the rule be modified to incorporate a materiality 
standard so that a fund need retain only those records that reflect the 
resolution of material discrepancies. Three commenters recommended that 
we eliminate the requirement that mutual funds retain copies of 
documents used to verify customer identities. One commenter requested 
clarification on the types of records that will suffice to memorialize 
non-documentary customer verification methods and their results.
    In light of these comments, we have reconsidered and modified the 
recordkeeping requirements of the rule. The final rule provides that a 
mutual fund's CIP must include procedures for making and maintaining a 
record of all information obtained under the procedures implementing 
the requirement that a mutual fund develop and implement a CIP.\97\ 
However, the final rule is significantly more flexible than the 
proposed rule. Under the final rule, in addition to required 
identifying information about a customer, a mutual fund's records must 
include a description, rather than a copy, of any document that the 
mutual fund relied on to verify the identity of the customer, noting 
the type of document, any identification number contained in the 
document, the place of issuance, and the issuance and expiration dates, 
if any.\98\ The record must include ``a description'' of the methods 
and results of any measures undertaken to verify the identity of the 
customer, and of the resolution of any ``substantive'' discrepancy 
discovered when verifying the identifying information obtained, rather 
than any documents generated in connection with these measures.\99\
---------------------------------------------------------------------------

    \97\ Section 103.131(b)(3).
    \98\ Section 103.131(b)(3)(i)(A)-(B).
    \99\ Section 103.131(b)(3)(i)(C)-(D).
---------------------------------------------------------------------------

    As we stated in the proposed rule, nothing in the rule modifies, 
limits, or supersedes section 101 of the Electronic Signatures in 
Global and National Commerce Act.\100\ A mutual fund may use electronic 
records to satisfy the requirements of this final rule, in accordance 
with guidance that the Commission has issued.\101\
---------------------------------------------------------------------------

    \100\ Pub. L. 106-229, 114 Stat. 464 (15 U.S.C. 7001).
    \101\ See Electronic Recordkeeping by Investment Companies and 
Investment Advisers, Investment Company Act Release No. 24991 (May 
24, 2001)[66 FR 29224 (May 30, 2001)].
---------------------------------------------------------------------------

Section 103.131(b)(3)(ii) Record Retention

    We proposed to require that a mutual fund retain all required 
records for five years after the account is closed.\102\ Six commenters 
expressed concern about this aspect of the proposal, recommending that 
the recordkeeping period be shortened, or that mutual funds be required 
to retain records only for five years after verification of the 
customer's identity.
---------------------------------------------------------------------------

    \102\ Proposed Sec.  103.131(h).
---------------------------------------------------------------------------

    We believe that, by eliminating the requirement that a mutual fund 
retain copies of documents used to verify customer identities, the 
final rule addresses many of the commenters' concerns. Nonetheless, we 
believe that, while the identifying information provided by customers 
should be retained, there is little value in requiring mutual funds to 
retain the remaining records for five years after an account is closed, 
because this information is likely to be stale. Therefore, the final 
rule prescribes a bifurcated record retention schedule that is 
consistent with a general five-year retention requirement. Under the 
final rule, the mutual fund must retain the information referenced in 
paragraph (b)(3)(i)(A) (i.e., information obtained about a customer) 
for five years after the date the account is closed.\103\ The mutual 
fund need only retain a record that it must make and maintain under the 
other recordkeeping provisions, paragraphs (b)(3)(i)(B), (C), and (D) 
(i.e., information that verifies a customer's identity) for five years 
after the record is made.\104\
---------------------------------------------------------------------------

    \103\ Section 103.131(b)(3)(ii). The Secretary has determined 
that the records required to be kept by section 326 of the Act have 
a high degree of usefulness in criminal, tax, or regulatory 
investigations or proceedings, or in the conduct of intelligence or 
counterintelligence activities, to protect against international 
terrorism.
    \104\ Id.
---------------------------------------------------------------------------

Section 103.131(b)(4) Comparison With Government Lists

    We proposed to require that a mutual fund's CIP have procedures for 
determining whether the customer appears on any list of known or 
suspected terrorists or terrorist organizations prepared by any federal 
government agency and made available to the fund.\105\ In addition, the 
proposed rule stated that mutual funds must follow all federal 
directives issued in connection with such lists.\106\
    Six commenters recommended that the final rule specify which 
government lists must be checked and provide a mechanism for 
communicating that information to mutual funds. These commenters also 
suggested that all such lists be consolidated, and that mutual funds 
not be required to check such lists until an account is established or 
a customer receives services from the fund.
---------------------------------------------------------------------------

    \105\ Proposed Sec.  103.131(e).
    \106\ Id.
---------------------------------------------------------------------------

    The final rule states that a mutual fund's CIP must include 
procedures for

[[Page 25140]]

determining whether the name of the customer appears on any list of 
known or suspected terrorists or terrorist organizations issued by any 
federal government agency and designated as such by Treasury in 
consultation with the federal functional regulators.\107\ Because 
Treasury and the federal functional regulators have not yet designated 
any such lists, the final rule cannot be more specific with respect to 
the lists that mutual funds must check. However, mutual funds will not 
have an affirmative duty under this rule to seek out all lists of known 
or suspected terrorists or terrorist organizations compiled by the 
federal government. Instead, mutual funds will receive notification by 
way of separate guidance regarding the lists that they must consult for 
purposes of this provision.
---------------------------------------------------------------------------

    \107\ Section 103.131(b)(4).
---------------------------------------------------------------------------

    We also have modified this provision to give guidance as to when a 
mutual fund must consult a list of known or suspected terrorists or 
terrorist organizations. The final rule states that the CIP's 
procedures must require the mutual fund to determine whether a customer 
appears on a list ``within a reasonable period of time'' after the 
account is opened, or earlier if required by another federal law or 
regulation or by a federal directive issued in connection with the 
applicable list.\108\
    The final rule also requires a mutual fund's CIP to include 
procedures that require the fund to follow all federal directives 
issued in connection with such lists. Again, because no lists have yet 
been designated under this provision, the final rule cannot provide 
more guidance in this area.
---------------------------------------------------------------------------

    \108\ Id.
---------------------------------------------------------------------------

Section 103.131(b)(5) Customer Notice

    We proposed to require that a mutual fund's CIP include procedures 
for providing customers with adequate notice that the fund is 
requesting information to verify their identities.\109\ The proposed 
rule stated that a mutual fund could satisfy that notice requirement by 
generally notifying its customers about the fund's verification 
procedures.\110\ It stated that if an account is opened electronically, 
such as through an Internet website, the mutual fund could provide 
notice electronically.
---------------------------------------------------------------------------

    \109\ Proposed Sec.  103.131(f).
    \110\ Proposed rule, supra note 1, at section II.F.
---------------------------------------------------------------------------

    Three commenters generally supported the proposal, but asked that 
we provide model language and additional guidance about the 
circumstances in which a mutual fund would be deemed to comply with the 
requirement. One commenter stated that the proposed notice requirement 
was overbroad.
    The Act requires that our rules ``at a minimum, require financial 
institutions to * * * [give] customers * * * adequate notice'' of the 
procedures they adopt concerning customer identification. Based on this 
statutory requirement, the final rule requires a mutual fund's CIP to 
include procedures for providing fund customers with adequate notice 
that the fund is requesting information to verify their 
identities.\111\ The final rule provides additional guidance regarding 
what constitutes adequate notice and the timing of the notice 
requirement. The final rule states that notice is adequate if the 
mutual fund generally describes the identification requirements of the 
final rule and provides notice in a manner reasonably designed to 
ensure that a customer views the notice, or is otherwise given notice, 
before opening an account.\112\ The final rule states that a mutual 
fund may, depending on how an account is opened, post a notice on its 
website, include the notice on its account applications, or use any 
other form of oral or written notice.\113\ In addition, the final rule 
includes sample language that, if appropriate, will be deemed adequate 
notice to a mutual fund's customers when provided in accordance with 
the requirements of this final rule.\114\
---------------------------------------------------------------------------

    \111\ Section 103.131(b)(5)(i).
    \112\ Although a fund may include the notice in its prospectus, 
the prospectus would need to be provided to the investor no later 
than the trade date in order to satisfy the requirement that the 
notice be provided in a manner reasonably designed to ensure that a 
customer receives it before the account is opened.
    \113\ Section 103.131(b)(5)(ii).
    \114\ Section 103.131(b)(5)(iii).
---------------------------------------------------------------------------

Section 103.131(b)(6) Reliance on Other Financial Institutions

    In the proposed rule we recognized that because mutual funds 
typically conduct their operations through separate entities, some 
elements of the CIP will best be performed by personnel of these 
separate entities.\115\ As we stated, it is permissible for 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.\116\ However, the mutual fund remains responsible for 
assuring compliance with the rule, and therefore must actively monitor 
the operation of its CIP and assess its effectiveness.\117\
    Four commenters suggested that, in certain circumstances, mutual 
funds be permitted to rely on customer identification and verification 
performed by other financial institutions (including other funds in the 
same fund complex). Two commenters suggested that an investor that 
opens an account or conducts a transaction with a mutual fund through 
another financial institution that is itself subject to BSA anti-money 
laundering and CIP requirements should be considered a customer of the 
other financial institution and not a customer of the mutual fund. One 
commenter suggested that all intermediated accounts (i.e., accounts 
that are opened through another financial institution) be treated 
similarly to omnibus accounts when the intermediary has identification 
and verification responsibilities under the BSA.
---------------------------------------------------------------------------

    \115\ Proposed rule, supra note 1, section II.B.
    \116\ Id.
    \117\ Id.
---------------------------------------------------------------------------

    We recognize that there may be circumstances in which a mutual fund 
should be able to rely on the performance by another financial 
institution of some or all of the elements of the fund's CIP. 
Therefore, the final rule provides that a mutual fund's CIP may include 
procedures that specify when the fund will rely on the performance by 
another financial institution of any procedures of the fund's CIP and 
thereby satisfy the mutual fund's obligations under the rule.\118\ 
Reliance is permitted if a customer of the mutual fund is opening, or 
has opened, an account or has established a similar business 
relationship with the other financial institution to provide or engage 
in services, dealings, or other financial transactions.\119\
---------------------------------------------------------------------------

    \118\ See Sec.  103.131(b)(6).
    \119\ Id.
---------------------------------------------------------------------------

    In order for a mutual fund to rely on the other financial 
institution, (1) such reliance must be reasonable under the 
circumstances, (2) the financial institution must be subject to a rule 
implementing the anti-money laundering compliance program requirements 
of 31 U.S.C. 5318(h) and be regulated by a federal functional 
regulator, and (3) the other financial institution must enter into a 
contract with the mutual fund requiring it to certify annually to the 
mutual fund that it has implemented an anti-money laundering program 
and will perform (or its agent will perform) the specified requirements 
of the mutual fund's CIP.\120\ The contract and certification will 
provide a standard means for a mutual fund to demonstrate the extent to 
which it is relying on another

[[Page 25141]]

institution to perform its CIP and that the institution has in fact 
agreed to perform these requirements.\121\ If it is not clear from 
these documents, a mutual fund must be able to otherwise demonstrate 
when it is relying on another institution to perform its CIP with 
respect to a particular customer. The mutual fund will not be held 
responsible for the failure of the other financial institution to 
fulfill adequately the mutual fund's CIP responsibilities, provided 
that the mutual fund can establish that its reliance was reasonable and 
that it has obtained the requisite contracts and certifications. 
Treasury and the SEC emphasize that the mutual fund and the other 
financial institution upon which it relies must satisfy all of the 
conditions set forth in this final rule. If they do not, then the 
mutual fund remains solely responsible for applying its own CIP to each 
customer in accordance with this rule.\122\
---------------------------------------------------------------------------

    \120\ Id.
    \121\ A mutual fund must be able to demonstrate that the other 
financial institution has agreed to perform the relevant 
requirements of the fund's CIP, regardless of whether the other 
financial institution is an affiliated person of the fund. 
Accordingly, the contract and certification requirement in the final 
rule applies equally to affiliated person or unaffiliated person 
reliance.
    \122\ This provision of the rule does not affect the ability of 
a mutual fund to contractually delegate the implementation and 
operation of its CIP to another service provider. However, the 
mutual fund remains responsible for assuring compliance with the 
rule, and therefore must actively monitor the operation of its CIP 
and assess its effectiveness.
---------------------------------------------------------------------------

    All of the federal functional regulators are adopting comparable 
provisions in their CIP rules to permit such reliance. Furthermore, the 
federal functional regulators expect to cooperate and share information 
to determine whether the institutions subject to their jurisdiction are 
in compliance with the conditions of the reliance provision of this 
rule.

Section 103.131(c) Exemptions

    The proposed rule provided that the SEC, with the concurrence of 
Treasury, may by order or regulation exempt any mutual fund or type of 
account from the requirements of the rule.\123\ Under the proposal, in 
issuing such exemptions, the SEC and Treasury were to consider whether 
the exemption is consistent with the purposes of the BSA, and in the 
public interest.\124\ The proposal stated that the SEC and Treasury 
could also consider other necessary and appropriate factors.\125\
---------------------------------------------------------------------------

    \123\ Proposed Sec.  103.131(j).
    \124\ Id.
    \125\ Id.
---------------------------------------------------------------------------

    Six commenters recommended that various types of accounts and 
customers be exempted from the final rule (e.g., participants in 
qualified retirement plans, court-appointed executors and guardians, 
and individuals granted authority to effect transactions in an account 
upon the death of a shareholder). We have incorporated any suggested 
exemptions that we have determined to be appropriate into the 
definitions of ``account'' and ``customer,'' for the reasons described 
above.\126\ We are adopting this provision of the rule as proposed.
---------------------------------------------------------------------------

    \126\ See notes 15-19, 20-30 and accompanying text supra.
---------------------------------------------------------------------------

Section 103.131(d) Other Requirements Unaffected

    The final rule includes a provision, parallel to that in the rules 
that require other financial institutions to adopt and implement 
CIPs,\127\ to the effect that nothing in Sec.  103.131 shall be 
construed to relieve a mutual fund of its obligations to obtain, 
verify, or maintain information that is required by another regulation 
in part 103. This provision will resolve any ambiguity if mutual funds 
in the future become obligated to obtain, verify, or maintain 
information under such regulations.
---------------------------------------------------------------------------

    \127\ As to the rules that require other financial institutions 
to adopt and implement CIPs, see supra Section I.A.
---------------------------------------------------------------------------

III. The Commission's Analysis of the Costs and Benefits Associated 
With the Final Rule

    Treasury and the Commission are sensitive to the costs and benefits 
imposed by their rules. Nevertheless, we believe that the rule imposes 
no costs in addition to those that would result from compliance with 
the USA PATRIOT Act by mutual funds. While the Commission believes the 
costs of the rule are attributable to the statute, the Commission has 
nonetheless undertaken an analysis of these requirements.
    Section 326 requires Treasury and the Commission to prescribe 
regulations setting forth minimum standards for mutual funds regarding 
verification of the identities of customers.\128\ The rule requires 
mutual funds to implement a written CIP as part of the anti-money 
laundering programs required by 31 U.S.C. 5318(h). The CIP must include 
risk-based procedures for verifying the identity of each customer, to 
the extent reasonable and practicable. As required by section 326, 
these procedures must (1) specify the identifying information that the 
mutual fund will obtain with respect to each customer, (2) contain 
procedures for verifying the identity of the customer, within a 
reasonable time after the account is opened, using documents, non-
documentary methods, or a combination of both, and (3) include 
procedures for responding to circumstances in which the mutual fund 
cannot form a reasonable belief that it knows the true identity of the 
customer. The CIP also must include procedures for (1) maintaining a 
record of all information obtained (for either five years after the 
date the account is closed or five years after the record is made, 
depending on the type of information), (2) determining whether the 
customer appears on any list of known or suspected terrorists or 
terrorist organizations issued by any federal agency and designated as 
such by the Department of the Treasury in consultation with the federal 
functional regulators, and (3) providing customers with adequate notice 
that the mutual fund is requesting information to verify their 
identities.
---------------------------------------------------------------------------

    \128\ As discussed above, section 326 provides that such 
regulations, at a minimum, must require financial institutions to 
implement, and customers to comply with, reasonable procedures for--
(A) verifying the identity of any person seeking to open an account 
to the extent reasonable and practicable; (B) maintaining records of 
the information used to verify a person's identity, including name, 
address, and other identifying information; and (C) consulting lists 
of known or suspected terrorists or terrorist organizations provided 
to the financial institution by any government agency to determine 
whether a person seeking to open an account appears on any such 
list. See Section I.A. supra.
---------------------------------------------------------------------------

    As discussed in more detail below, the Commission estimates that 
approximately 890 registered mutual funds and fund ``families'' are 
required to comply with section 326.\129\ The requirements of section 
326 as implemented by today's rule will impose initial, one-time costs 
and ongoing costs on mutual funds and fund families. The costs 
associated with establishment of CIPs and modification of computer 
systems and account applications (both paper and web-based 
applications) to conform to the information and notice requirements of 
the CIP will represent initial, one-time costs. Ongoing costs for 
mutual funds

[[Page 25142]]

and fund families will include: (1) Collecting the information required 
by the CIP; (2) verifying customers' identities; (3) determine whether 
customers appear on designated lists issued by federal government 
agencies; and (4) making and maintaining required records. The 
magnitude of these ongoing costs will, in large part, depend on the 
number of new accounts opened.
---------------------------------------------------------------------------

    \129\ Currently there are an estimated 3,060 mutual funds 
registered with the SEC. The 3,060 registered mutual funds are 
advised by approximately 890 different primary investment advisers. 
We assume, for purposes of this analysis, that mutual funds that 
share a common primary investment adviser are part of the same fund 
family. Therefore, we assume that 890 fund families will be required 
by today's rule to develop and implement a CIP. For purposes of 
estimating the total costs associated with section 326 requirements 
in the Proposed rule, we assumed that each mutual fund would be 
responsible for establishing a CIP. See proposed rule, supra note 11 
at Section V.B.1. Consequently, the initial cost for the 3,060 
mutual funds was estimated to be approximately $19,125,000. In the 
proposed rule, we acknowledged that using the number of mutual funds 
to estimate the costs may result in a high estimate of those costs, 
and said that we assumed that, in many instances, a single CIP will 
be developed by a mutual fund family and used by all of the funds in 
that family. See proposed rule, supra note 11, at n.20.
---------------------------------------------------------------------------

    The Commission and Treasury believe that the requirements in the 
final rule are reasonable and practicable and that, accordingly, the 
costs to mutual funds and fund families of compliance with the rule's 
requirements are attributable to the statute. In the proposed rule, we 
requested comment and specific data regarding the costs and benefits of 
the proposed rule. We did not receive any data in comment letters 
concerning the costs and benefits of the proposed rule.

A. Benefits Associated With the Final Rule

    We anticipate that mutual funds, fund customers, and the nation as 
a whole will benefit from the new rule. The anti-money laundering 
provisions of the USA PATRIOT Act are intended to facilitate the 
prevention, detection, and prosecution of money laundering and 
terrorist financing. Today's rule implements an important part of those 
provisions. By requiring that mutual funds establish CIPs, section 326 
and the rule will limit the ability of criminals, including terrorists, 
to use mutual fund accounts to finance their activities, or shelter the 
proceeds of criminal conduct. Moreover, mutual fund CIPs should deter 
criminals from using mutual fund accounts to perpetrate fraud on the 
fund complex (by placing fictitious buy and sell orders) and identity 
theft of legitimate mutual fund customers. We also believe that the 
rules provide greater certainty to the private sector on how to comply 
with the USA PATRIOT Act because they are consistent with and 
comparable to the rules adopted by the other federal functional 
regulators. Finally, in order to reduce compliance burdens, the final 
rule allows mutual funds flexibility to adopt CIPs and to distribute 
notices that are best suited to the funds' businesses and needs. These 
benefits are difficult to quantify. We received no data from commenters 
quantifying the value of these benefits.

B. Costs Associated With the Final Rule

    Section 326 of the USA PATRIOT Act, and the new rule, allow for 
great flexibility in the development of CIPs. Differences in the ways 
that mutual fund accounts are opened, fund shares are distributed, and 
fund purchases, sales and exchanges are effected; differences in the 
various types of accounts maintained by mutual funds; and differences 
among mutual fund customer bases make it difficult to quantify 
accurately a universally applicable cost per mutual fund. Most mutual 
funds currently have some procedures in place for collecting 
information about and verifying the identities of their customers, and 
for detecting fraud in the account opening process by looking for 
inconsistencies in the information provided by customers and/or 
checking customer names against certain databases. We anticipate that 
the requirements of section 326 as implemented by today's rule 
nonetheless will impose initial, one-time costs and ongoing costs on 
mutual funds and fund families in connection with formulating and 
implementing programs that comply with today's rule, and modifying 
existing procedures to conform to those new programs. Initial one-time 
costs associated with establishment of CIPs would include: (1) The 
development, adoption, and implementation of a CIP; (2) the creation or 
modification of computer systems and account applications (both paper 
and web-based applications) to collect required information and 
disseminate required notices; (3) the modification of electronic 
recordkeeping systems to verify and retain the required information; 
and (4) personnel training. Ongoing costs for mutual funds and fund 
families will include: (1) Collecting the information required by the 
CIP; (2) verifying customers' identities; (3) determining whether 
customers appear on designated lists issued by federal government 
agencies; and (4) making and maintaining required records. As discussed 
above, the magnitude of these ongoing costs will, in large part, depend 
on the number of new accounts opened. From January 1, 1990 through 
December 31, 2001, approximately 16 million mutual fund accounts were 
opened annually.\130\
---------------------------------------------------------------------------

    \130\ This estimate is derived from information reported in the 
Investment Company Institute's 2002 Mutual Fund Fact Book. It 
represents the net annual increase in the number of mutual fund 
accounts. The actual number of new accounts that were opened during 
this period is probably higher because this estimate is reduced by 
the number of accounts that were closed during the same period. No 
data are available regarding the number of accounts that were 
closed. The number of accounts with respect to which customers' 
identities will be required to be verified is, however, 
significantly lower than the aggregate number of new accounts that 
are created annually. A mutual fund will not be required to verify 
the identity of a customer who has an existing account with the 
mutual fund, provided that the mutual fund has a reasonable belief 
that it knows the true identity of the person. See note supra and 
accompanying text. A mutual fund may also, in certain circumstances, 
rely on the performance by another financial institution of any 
procedures of the mutual fund's CIP with respect to a customer. See 
notes 118-122 supra and accompanying text.
---------------------------------------------------------------------------

1. Costs Associated With Establishing a CIP
    Program Implementation. Section 326 of the Act and the new rule 
require mutual funds to develop written CIPs. Based on discussions with 
industry representatives, the Commission estimates that it will take 
approximately 50 hours for a fund, or fund family, to develop a CIP at 
a cost of approximately $3,810.\131\ Based on these assumptions, we 
estimate that the aggregate cost of developing CIPs will be 
approximately $3.4 million ($3,810 per program x 890 fund families).
---------------------------------------------------------------------------

    \131\ We estimate that it will take compliance personnel 45 
hours at a cost of $62 per hour, attorneys 4 hours at a cost of $130 
per hour, and directors 1 hour at $500 per hour, to develop a CIP. 
We have revised this estimate since the proposal to more accurately 
reflect the hourly costs of the various types of persons who must be 
involved in the creation and implementation of a CIP. This estimate 
of the cost of developing a CIP includes the cost of the rule's 
requirement that the mutual fund's CIP include procedures for 
providing fund customers with notice that the fund is requesting 
information to verify their identities. A mutual fund may satisfy 
the notice requirement by generally notifying its customers about 
the procedures the fund must comply with to verify their identities. 
Depending on how accounts are opened, the mutual fund may post a 
notice on its website, or provide customers with any other form of 
written or oral notice.
---------------------------------------------------------------------------

    We believe this is a reasonable estimate of the cost of developing 
and implementing CIPs. We recognize that the actual development costs 
associated with establishing a CIP may vary from this estimate 
depending upon the size of the mutual fund or fund family, the 
distribution channels used by the fund or fund family, the fund's 
customer base, number of affiliates, and the extent to which a fund or 
fund family relies on third parties or allocates responsibilities under 
its CIP. For mutual funds that delegate implementation of their CIPs to 
unaffiliated service providers, the burden per mutual fund may be less 
because those service providers will likely use the same or similar 
software and systems for several different registrants. Similarly, the 
cost per fund for funds that use a CIP developed by their fund family 
may be less.
    Systems Modifications. The Commission anticipates that the new rule 
will cause individual mutual funds and mutual fund families to incur 
costs to modify items such as account applications and websites, to 
create or modify electronic links to other databases, and to modify 
their electronic recordkeeping systems in order to

[[Page 25143]]

collect, verify, and retain the required information, and to provide 
the required notice to customers. The cost-benefit analysis in the 
proposed rule did not discuss the time and costs associated with 
computer system modifications, but commenters suggested that these 
costs could be substantial. The Commission estimates, based on 
discussions with industry representatives, that it will cost each fund 
or fund family approximately $40,000 to make these types of system 
modifications.\132\ Therefore the Commission estimates that there will 
be a one-time aggregate cost of approximately $36 million for these 
systems modifications.
---------------------------------------------------------------------------

    \132\ Based on discussions with industry representatives, SEC 
staff estimates that it will take compliance personnel fifteen 
hours, at $62 per hour ($930) to modify fund account applications in 
order to collect all of the required information from and provide 
required notice to fund customers. The SEC staff estimates that the 
aggregate cost of such modifications will be approximately $828,000 
($930 per fund family x 890 fund families). Based on discussions 
with industry representatives, the SEC staff estimates that it will 
take computer programmers 640 hours at $62 per hour to implement the 
necessary computer system modifications ($39,680). The SEC staff 
estimates the aggregate cost of these modifications to be $35.3 
million ($39,680 per fund family x 890 fund families). Thus, the SEC 
staff estimates the total costs of systems modifications to be $36.1 
million ($35.3 million + $828,000).
---------------------------------------------------------------------------

2. Ongoing Costs
    As mentioned above, ongoing costs for mutual funds will be 
associated with the need to: (1) Collect the information required by 
the CIPs, (2) verify customers' identities, (3) determine whether 
customers appear on lists provided by federal agencies, and (4) make 
and maintain records related to CIPs.
    Information Collection. Although mutual funds generally require 
customers to provide a name and mailing address in order to open an 
account, mutual funds currently may not require all fund customers to 
provide all of the information required to be collected pursuant to a 
CIP. Moreover, mutual funds may not be collecting all such information 
with respect to all of the persons who will be considered to be 
customers for purposes of the new rule. Therefore the Commission 
anticipates that mutual funds will incur costs in connection with the 
collection of identifying information from their customers. Based on 
discussions with industry participants, the staff of the SEC estimates 
that the average time spent collecting the required information will be 
between one and four minutes per account and that the hourly personnel 
and overhead cost associated with these requirements will be $25 per 
hour. Therefore, the SEC staff estimates that this burden will result 
in an aggregate annual cost to the industry of between $6.7 million and 
$26.7 million.\133\
---------------------------------------------------------------------------

    \133\ We estimate that there are 16 million new mutual fund 
shareholder accounts created each year. Therefore, we estimate the 
range of cost to be between $6.7 million (16 million new accounts 
per year x \1/60\ of an hour x $25) and $26.7 million (16 million 
new accounts per year x \1/15\ of an hour x $25).
---------------------------------------------------------------------------

    Information Verification. The new rule also requires CIPs to 
contain procedures for funds to verify customer identities. The rule 
provides funds with substantial flexibility to decide how they will 
verify identification information. The purpose of making the rule 
flexible is to give funds the ability to select verification methods 
that are, as section 326 requires, reasonable and practicable. The new 
rule allows a mutual fund to employ such verification methods as permit 
it to form a reasonable belief that it knows the true identities of its 
customers.
    The rule sets forth non-exclusive lists of methods that a fund may 
use to verify customer identification. A fund may use other reasonable 
methods that are currently available, or that become available in the 
future. The Commission believes that verifying the identifying 
information could result in costs for mutual funds because some firms 
currently may not use verification methods. Based on discussions with 
industry participants, the SEC staff estimates that the total annual 
cost to the industry to verify the identifying information will be 
between $49.3 million and $98.6 million.\134\
---------------------------------------------------------------------------

    \134\ The SEC staff believes that the processing costs 
associated with verification methods will be between $1.00 and $2.00 
per account. The SEC staff further estimates that the average time 
spent verifying an account will be between five and ten minutes. The 
hourly cost of the person who would undertake the verification is 
estimated to be $25 per hour including overhead. Therefore, the 
estimated costs to the industry reported above are between: $49.3 
million ((16 million new accounts per year) x ($1.00) + (16 million 
new accounts per year) x (\1/12\ of an hour) x ($25)) and $98.6 
million ((16 million new accounts per year) x ($2.00) + (16 million 
new accounts per year) x (\1/6\ of an hour) x ($25)).
---------------------------------------------------------------------------

    Resolution of discrepancies. Based on discussions with industry 
participants, the staff of the SEC believes that initial detection of 
discrepancies in information collected will be automated and conducted 
on a batch-file basis. Once discrepancies have been detected, staff of 
the SEC estimates that the average time spent by compliance personnel 
to resolve discrepancies in information collected will be between one 
and four minutes per account and that the hourly personnel and overhead 
cost associated with these requirements will be $25 per hour. 
Therefore, the SEC staff estimates that this burden will result in an 
aggregate annual cost to the industry of between $6.7 million and $26.7 
million.
    Comparison with government lists of known or suspected terrorists. 
Section 326 and the new rule require that mutual fund CIPs include 
reasonable procedures for determining whether a customer's name appears 
on designated lists of known or suspected terrorists or terrorist 
organizations issued by any federal government agency. Mutual funds 
should already have procedures for determining whether customers' names 
appear on some federal government lists. There are substantive legal 
requirements associated with the lists circulated by Treasury's Office 
of Foreign Asset Control (OFAC). Failure to comply with these 
requirements may result in criminal and civil penalties. Based on 
discussions with industry representatives the SEC staff estimates that 
the annual cost to the mutual fund industry of this requirement will be 
$3.4 million.\135\
---------------------------------------------------------------------------

    \135\ Based on discussions with industry representatives, the 
SEC staff estimates that it takes a data entry clerk approximately 
30 seconds to ascertain whether a customer's name is on a government 
list. We assume that for most mutual fund customers this check will 
be automated and conducted on a batch-file basis. Therefore we 
estimate that cost of this requirement is $.21 per customer (\1/120\ 
hour x $25 per hour (cost per hour of data entry)). We estimate the 
aggregate annual cost of this requirement to be $3.4 million ($.21 
per customer x 16 million customers).
---------------------------------------------------------------------------

    Recordkeeping. The Commission believes that the recordkeeping 
requirement in the new rule will result in additional costs for mutual 
funds that currently do not maintain certain of the records for the 
prescribed time period. We believe that most funds already retain 
certain of the records required by the new rule as a matter of good 
business practice.
    The proposed rule provided that mutual fund CIPs provide for the 
retention of all information for five years after a customer account is 
closed. The final rule bifurcates the record retention provisions so 
that funds will be required to retain customer identification 
information for five years after the account is closed, and to retain a 
description of (1) the documents relied upon to verify the customer's 
identity, (2) the methods and results of measures undertaken to verify 
the identity a customer and (3) the resolution of any substantive 
discrepancies discovered during the identity verification process for 
five years after the date the record was made. The SEC staff estimates, 
based on discussions with

[[Page 25144]]

representatives of the mutual fund industry, that this recordkeeping 
requirement will cost $13.3 million annually.\136\
---------------------------------------------------------------------------

    \136\ The staff estimates that it will take a data entry clerk 
approximately two minutes per customer to maintain the records 
required by the rule. The staff assumes that for most mutual fund 
accounts performance of this requirement will be automated. The 
staff estimates that the cost of this requirement will be $.83 per 
customer (\1/30\ hour x $25 per hour (estimated cost per hour of 
data entry)). We estimate the aggregate annual cost of this 
requirement to be $13.3 million ($.83 per customer x 16 million new 
accounts per year).
---------------------------------------------------------------------------

IV. Final Regulatory Flexibility Analysis

    Treasury and the Commission are sensitive to the impact our rules 
may impose on small entities. Congress enacted the Regulatory 
Flexibility Act \137\ to address concerns related to the effects of 
agency rules on small entities. Treasury and the Commission believed 
that the proposed rule likely would not have a ``significant economic 
impact on a substantial number of small entities.''\138\ First, the 
economic impact on small entities should not be significant because 
most small entities are likely to have a relatively small number of 
accounts, and thus compliance should not impose a significant economic 
impact. Second, the economic impact on mutual funds, including small 
entities, is imposed by the statute itself, and not by the rule. 
Treasury and the Commission sought comment on whether the proposed rule 
would have a significant economic impact on a substantial number of 
small entities and whether the costs are imposed by the statute itself 
and not the proposed rule. Treasury and the Commission did not receive 
any comments in response to this request.
---------------------------------------------------------------------------

    \137\ 5 U.S.C. 601 et seq.
    \138\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    While Treasury and the Commission believed that the proposed rule 
likely would not have a significant economic impact on a substantial 
number of small entities, we prepared an Initial Regulatory Flexibility 
Analysis that was published in the proposed rule. Therefore, a Final 
Regulatory Flexibility Analysis has been prepared for this final rule 
in accordance with 5 U.S.C. 604.

A. Need for and Objectives of the Rule

    Section 326 requires Treasury and the Commission jointly to issue a 
regulation setting forth minimum standards for mutual funds and their 
customers regarding the identities of customers that will apply in 
connection with the opening of an account at a mutual fund.\139\
---------------------------------------------------------------------------

    \139\ As discussed previously, section 326 provides that such 
regulations, at a minimum, must require mutual funds to implement, 
and customers to comply with, reasonable procedures for--(1) 
verifying the identity of any person seeking to open an account to 
the extent reasonable and practicable; (2) maintaining records of 
the information used to verify a person's identity, including name, 
address, and other identifying information; and (3) consulting lists 
of known or suspected terrorists or terrorist organizations provided 
to the financial institution by any government agency to determine 
whether a person seeking to open an account appears on any such 
list.
---------------------------------------------------------------------------

    The purpose of section 326, and the regulations promulgated 
thereunder, is to make it easier to prevent, detect, and prosecute 
money laundering and the financing of terrorism. In issuing the final 
rule, Treasury and the Commission are seeking to fulfill their 
statutorily mandated responsibilities under section 326 and to achieve 
its important purpose.
    The objective of the final rule is to make it easier to prevent, 
detect, and prosecute money laundering and the financing of terrorism. 
The rule seeks to achieve this goal by specifying the information 
mutual funds must obtain from or about customers that can be used to 
verify the identity of the customers. This will make it more difficult 
for persons to use false identities to establish customer relationships 
with mutual funds for the purposes of laundering money or moving funds 
to effectuate illegal activities, such as financing terrorism.

B. Significant Issues Raised by Public Comment

    In the proposed rule, Treasury and the Commission specifically 
requested public comments on any aspect of the IRFA, as well as the 
number of small entities that might be affected by the proposed rule. 
The agencies received no comments on the IRFA.

C. Small Entities Subject to the Rule

    A small business or organization (collectively, ``small entity'') 
for purposes of the Regulatory Flexibility Act, is a small entity if 
the fund, together with other funds in the same group of related funds, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year.\140\ Of approximately 3,060 registered mutual funds, 
approximately 158 are small entities. These 158 small entities are 
divided into approximately 154 fund families.\141\ As discussed above 
in Section III, in most cases, a single customer identification program 
will be developed and used by all of the mutual funds in a family of 
funds.
---------------------------------------------------------------------------

    \140\ Rule 0-10 [17 CFR 27.0-10].
    \141\ The estimates of the number of registered mutual funds 
that are small entities and of the number of fund families are based 
on figures compiled by the Commission staff from outside databases.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The rule requires a mutual fund to adopt a written CIP that, at a 
minimum, includes each of the following: (1) Risk-based procedures for 
verifying the identity of each customer, to the extent reasonable and 
practicable;\142\ (2) procedures for maintaining records of all 
information obtained under its customer identity verification 
procedures, (3) procedures for determining whether a customer appears 
on any list of known or suspected terrorists or terrorist organizations 
issued by the federal government and designated by Treasury, and (4) 
procedures for providing notice to customers.
---------------------------------------------------------------------------

    \142\ These procedures must specify the identifying information 
that the mutual fund will obtain with respect to each customer, such 
information to include, at a minimum, name, date of birth (for an 
individual), street address, and identification number.
---------------------------------------------------------------------------

    As noted above, the rule is not expected to have a significant 
economic impact on a substantial number of small entities. Commission 
staff estimates that developing a CIP will require approximately 50 
hours of each fund or fund family developing a CIP, at a cost of 
approximately $3,810,\143\ and that systems modification will entail 
approximately 655 hours at a cost of $40,610 to each fund or fund 
family.\144\
---------------------------------------------------------------------------

    \143\ See note 131 supra regarding the cost of developing a CIP.
    \144\ See note 132 supra regarding the cost of systems 
modifications.
---------------------------------------------------------------------------

    Although small entities will also incur ongoing costs, the 
Commission expects that they will not have a significant economic 
impact. For each new account, a fund will require what we estimate to 
be 1-4 minutes for collecting customer information, 5-10 minutes for 
verifying customer information, 1-4 minutes for resolution of 
discrepancies in customer information, half a minute for comparison to 
government lists, and 2 minutes for record retention, each at a cost of 
approximately $25 per hour. Small entities are likely to have a 
relatively small number of accounts; therefore, they will incur the 
ongoing costs of individual customer identifications relatively 
infrequently.

E. Agency Action To Minimize Effect on Small Entities

    Treasury and the Commission considered significant alternatives to 
the proposed rule that would accomplish the stated objective, while 
minimizing any significant adverse impact on small

[[Page 25145]]

entities. In connection with the proposed rule, we considered the 
following alternatives: (1) The establishment of differing compliance 
or reporting requirements or timetables that take into account the 
resources of small entities; (2) the clarification, consolidation, or 
simplification of compliance and reporting requirements under the rule 
for small entities; (3) the use of performance rather than design 
standards; and (4) an exemption from coverage of the rule, or any part 
thereof, for small entities.
    The final rule provides for substantial flexibility in how each 
mutual fund may meet its requirements. This flexibility is designed to 
account for differences between mutual funds, including size. 
Nonetheless, Treasury and the Commission did consider the alternatives 
described above. Treasury and the Commission believe that the 
alternative approaches to minimize the adverse impact of the rule on 
small entities are not consistent with the statutory mandate of section 
326. In addition, Treasury and the Commission do not believe that an 
exemption for small mutual funds is appropriate, given the flexibility 
built into the rule to account for, among other things, the differing 
sizes and resources of mutual funds, as well as the importance of the 
statutory goals and mandate of section 326. Money laundering can occur 
in small firms as well as large firms.

V. Paperwork Reduction Act

    Certain provisions of the final rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995.\145\ An agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless it displays a currently valid control number. Treasury submitted 
the final rule to the Office of Management and Budget (``OMB'') for 
review in accordance with 44 U.S.C 3507(d). The OMB has approved the 
collection of information requirements in today's rule under control 
number 1506-0033.
---------------------------------------------------------------------------

    \145\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    In the proposed rule Treasury and the Commission estimated the 
paperwork burden that would be imposed by the rule and sought comments 
on the estimates. None of the commenters specifically addressed the 
paperwork burden associated with the rule.

A. Collection of Information Under the Final Rule

    The final rule contains recordkeeping and disclosure requirements 
that are subject to the Paperwork Reduction Act of 1995. Like the 
proposed rule, the final rule requires mutual funds to (1) maintain 
records of the information used to verify customers' identities and (2) 
provide notice to customers that information they supply may be used to 
verify their identities. These recordkeeping and disclosure 
requirements are required under section 326 of the Act. The final rule 
also contains a new recordkeeping provision--a mutual fund that relies 
on another financial institution to perform some or all of the elements 
of its CIP must obtain and retain an annual certification from the 
financial institution that it has implemented its anti-money laundering 
program, and that it will perform (or its agent will perform) the 
specified requirements of the mutual fund's CIP.

B. Proposed Use of the Information

    Section 326 of the Act requires Treasury and the Commission jointly 
to issue a regulation setting forth minimum standards for mutual funds 
to verify the identities of their customers. Furthermore, section 326 
provides that the regulations must, at a minimum, require mutual funds 
to implement reasonable procedures for (1) verifying the identity of 
any person seeking to open an account, to the extent reasonable and 
practicable; (2) maintaining records of the information used to verify 
the person's identity, including name, address, and other identifying 
information; and (3) determining whether the person appears on any 
lists of known or suspected terrorists or terrorist organizations 
provided to the financial institution by any government agency.
    The purpose of section 326, and the regulations promulgated 
thereunder, is to make it easier to prevent, detect and prosecute money 
laundering and the financing of terrorism. In issuing the final rule, 
Treasury and the Commission are seeking to fulfill their statutorily 
mandated responsibilities under section 326 and to achieve its 
important purpose.
    The final rule requires each mutual fund to establish a written CIP 
that must include recordkeeping procedures and procedures for providing 
customers with notice that the mutual fund is requesting information to 
verify their identity. The final rule requires a mutual fund to 
maintain a record of (1) the identifying information provided by the 
customer, the type of identification document(s) reviewed, if any, and 
the identification number of the document(s); (2) the means and results 
of any additional measures undertaken to verify the identity of the 
customer; and (3) the resolution of any discrepancy in the identifying 
information obtained.
    The final rule also requires each mutual fund to give customers 
``adequate notice'' of the identity verification procedures. Depending 
on how an account is opened, a mutual fund may satisfy this disclosure 
requirement by providing customers with any form of written or oral 
notice. Accordingly, a mutual fund may choose among a variety of 
methods of providing adequate notice and may select the least 
burdensome method, given the circumstances under which customers seek 
to open new accounts.
    The final rule permits a mutual fund to rely on performance of 
elements of its CIP by other financial institutions. The required 
contract and certification will provide mutual fund examiners with a 
standard means of ascertaining that the other financial institution has 
agreed to undertake the mutual fund's CIP requirements.

C. Respondents

    The final rule will apply to approximately 3,060 mutual fund 
companies that are registered with the Commission.\146\
---------------------------------------------------------------------------

    \146\ This estimate is based on figures compiled by the 
Commission staff from Commission filings.
---------------------------------------------------------------------------

D. Total Annual Reporting and Recordkeeping Burden

1. Recordkeeping
    The requirement to make and maintain records related to the CIP 
will be an annual burden. As adopted, the rule differs from the 
proposed rule in its requirements for the retention of records of 
information obtained under customer identification procedures. Whereas 
the proposed rule required that such records be retained until five 
years after the date the account of a customer is closed or the grant 
of authority to effect transactions with respect to an account is 
revoked, the final rule has two different times for the start of the 
five-year period for record retention: (1) The date the account is 
closed, for identifying information about the customer, and (2) the 
date the record is made, for descriptions of any documents relied on 
for verification of identity, of the methods and results of any 
measures undertaken to verify customer identity and of the resolution 
of any substantive discrepancy discovered when verifying identifying 
information.
    We believe that most mutual funds already retain certain of the 
records required by the new rule as a matter of good business practice, 
but that the

[[Page 25146]]

recordkeeping requirement will result in additional costs for mutual 
funds that do not currently maintain records for the prescribed time 
period. The total industry-wide burden will depend on the number of new 
accounts added each year. We estimate that data entry will require 
approximately two minutes per customer, and therefore that the annual, 
industry-wide burden will be approximately 533,000 hours.\147\
---------------------------------------------------------------------------

    \147\ Since mutual funds will not be required to comply with the 
requirements of this final rule until October 1, 2003, the industry-
wide burden during the first year will be approximately 133,250 
hours.
---------------------------------------------------------------------------

    We believe that there is a nominal burden associated with the new 
recordkeeping requirement. Under the final rule, a mutual fund may rely 
on another financial institution to perform some or all its CIP under 
certain conditions, including that the financial institution must enter 
into a contract requiring the financial institution to certify annually 
to the fund that it has implemented its anti-money laundering program 
and that it will perform (or its agent will perform) the specified 
elements of the fund's CIP. Not all mutual funds will choose to rely on 
a third party. The minimal burden of retaining the certification 
described above should allow a mutual fund to reduce its net burden 
under the rule by relying on another financial institution to perform 
some or all of its CIP.
2. Providing Notice to Customers
    The requirement for mutual funds to provide the required notice to 
customers regarding use of customers' information will create a one-
time burden by necessitating the amendment of mutual funds' account 
applications, both paper and web-based. As adopted, the rule differs 
from the proposed rule in providing additional guidance regarding what 
constitutes adequate notice and on the timing of the notice 
requirement, and in including sample language that, if appropriate, 
will be deemed adequate notice to a mutual fund's customers. We 
estimate that the estimated 3,060 registered mutual funds will each 
spend approximately two hours modifying their account applications. 
Thus, we estimate that the industry-wide burden will be approximately 
6,120 hours.

E. Collection of Information Is Mandatory

    These recordkeeping and disclosure (notice) requirements are 
mandatory.

F. Confidentiality

    The collection of information pursuant to the final rule would be 
provided by customers and other sources to mutual funds and maintained 
by mutual funds. In addition, the information may be used by federal 
regulators and other authorities in the course of examinations, 
investigations, and judicial proceedings. No governmental agency 
regularly would receive any of the information described above.

G. Record Retention Period

    The final rule requires that the identifying information obtained 
about a customer be retained until five years after the date the 
account of the customer is closed and that other records relating to 
the verification of the customer be retained until five years after the 
record is made.

H. Request for Comment

    Treasury and the Commission invite comment on the accuracy of the 
burden estimates and suggestions on how to further reduce these 
burdens. Comments should be sent (preferably by fax (202-395-6974)) to 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Office of Management and Budget, Paperwork 
Reduction Project (1506-0033), Washington, DC 20503 (or by the Internet 
to [email protected]), with a copy to FinCEN by mail or the Internet 
at the addresses previously specified.

VI. Executive Order 12866

    The Department of the Treasury has determined that this rule is not 
a significant regulatory action for purposes of Executive Order 12866. 
As noted above, the final rule parallels the requirements of section 
326 of the Act. Accordingly, a regulatory impact analysis is not 
required.

List of Subjects

17 CFR Part 270

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

31 CFR Part 103

    Administrative practice and procedure, Authority delegations 
(Government agencies), Banks, Banking, Brokers, Currency, Foreign 
banking, Foreign currencies, Gambling, Investigations, Investment 
companies, Law enforcement, Penalties, Reporting and recordkeeping 
requirements, Securities.

Securities and Exchange Commission

17 CFR Chapter II

Authority and Issuance

    The Commission is adopting 17 CFR 270.0-11 pursuant to the 
authority set forth in sections 6(c) and 38(a) of the Act [15 U.S.C. 
80a-6(c) and 80a-37(a)].

0
For the reasons as set out in the preamble, title 17, part 270 of the 
Code of Federal Regulations is amended as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
1. The authority citation for part 270 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
unless otherwise noted;
* * * * *

0
2. Section 270.0-11 is added to read as follows:


Sec.  270.0-11  Customer identification programs.

    Each registered open-end company is subject to the requirements of 
31 U.S.C. 5318(l) and the implementing regulation at 31 CFR 103.131, 
which requires a customer identification program to be implemented as 
part of the anti-money laundering program required under subchapter II 
of chapter 53 of title 31, United States Code and the implementing 
regulations issued by the Department of the Treasury at 31 CFR part 
103. Where 31 CFR 103.131 and this chapter use different definitions 
for the same term, the definition in 31 CFR 103.131 shall be used for 
the purpose of compliance with 31 CFR 103.131. Where 31 CFR 103.131 and 
this chapter require the same records to be preserved for different 
periods of time, such records shall be preserved for the longer period 
of time.

    By the Securities and Exchange Commission.

    Dated: April 29, 2003.
Margaret H. McFarland,
Deputy Secretary.

Department of the Treasury

31 CFR Chapter I

Authority and Issuance

    Treasury is adopting 31 CFR 103.131 pursuant to the authority set 
forth in 31 U.S.C. 5318(l).

0
For the reasons as set out in the preamble, title 31, part 103 of the 
Code of Federal Regulations is amended as follows:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FOREIGN TRANSACTIONS

0
3. The authority citation for part 103 continues to read as follows:


[[Page 25147]]


    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, secs. 312, 313, 314, 319, 326, 352, Pub L. 
107-56, 115 Stat. 307, 12 U.S.C. 1818, 12 U.S.C. 1786(q).


0
4. Subpart I of part 103 is amended by adding Sec.  103.131 to read as 
follows:


Sec.  103.131  Customer identification programs for mutual funds.

    (a) Definitions. For purposes of this section:
    (1)(i) Account means any contractual or other business relationship 
between a person and a mutual fund established to effect transactions 
in securities issued by the mutual fund, including the purchase or sale 
of securities.
    (ii) Account does not include:
    (A) An account that a mutual fund acquires through any acquisition, 
merger, purchase of assets, or assumption of liabilities; or
    (B) An account opened for the purpose of participating in an 
employee benefit plan established under the Employee Retirement Income 
Security Act of 1974.
    (2)(i) Customer means:
    (A) A person that opens a new account; and
    (B) An individual who opens a new account for:
    (1) An individual who lacks legal capacity, such as a minor; or
    (2) An entity that is not a legal person, such as a civic club.
    (ii) Customer does not include:
    (A) A financial institution regulated by a federal functional 
regulator or a bank regulated by a state bank regulator;
    (B) A person described in Sec.  103.22(d)(2)(ii) through (iv); or
    (C) A person that has an existing account with the mutual fund, 
provided that the mutual fund has a reasonable belief that it knows the 
true identity of the person.
    (3) Federal functional regulator is defined at Sec.  103.120(a)(2).
    (4) Financial institution is defined at 31 U.S.C. 5312(a)(2) and 
(c)(1).
    (5) Mutual fund means an ``investment company'' (as the term is 
defined in section 3 of the Investment Company Act (15 U.S.C. 80a-3)) 
that is an ``open-end company'' (as that term is defined in section 5 
of the Investment Company Act (15 U.S.C. 80a-5)) that is registered or 
is required to register with the Commission under section 8 of the 
Investment Company Act (15 U.S.C. 80a-8).
    (6) Non-U.S. person means a person that is not a U.S. person.
    (7) Taxpayer identification number is defined by section 6109 of 
the Internal Revenue Code of 1986 (26 U.S.C. 6109) and Internal Revenue 
Service regulations implementing that section (e.g., social security 
number or employer identification number).
    (8) U.S. person means:
    (i) A United States citizen; or
    (ii) A person other than an individual (such as a corporation, 
partnership or trust), that is established or organized under the laws 
of a State or the United States.
    (b) Customer identification program: minimum requirements.
    (1) In general. A mutual fund must implement a written Customer 
Identification Program (``CIP'') appropriate for its size and type of 
business that, at a minimum, includes each of the requirements of 
paragraphs (b)(1) through (5) of this section. The CIP must be a part 
of the mutual fund's anti-money laundering program required under the 
regulations implementing 31 U.S.C. 5318(h).
    (2) Identity verification procedures. The CIP must include risk-
based procedures for verifying the identity of each customer to the 
extent reasonable and practicable. The procedures must enable the 
mutual fund to form a reasonable belief that it knows the true identity 
of each customer. The procedures must be based on the mutual fund's 
assessment of the relevant risks, including those presented by the 
manner in which accounts are opened, fund shares are distributed, and 
purchases, sales and exchanges are effected, the various types of 
accounts maintained by the mutual fund, the various types of 
identifying information available, and the mutual fund's customer base. 
At a minimum, these procedures must contain the elements described in 
this paragraph (b)(2).
    (i) Customer information required. (A) In general. The CIP must 
contain procedures for opening an account that specify the identifying 
information that will be obtained with respect to each customer. Except 
as permitted by paragraph (b)(2)(i)(B) of this section, a mutual fund 
must obtain, at a minimum, the following information prior to opening 
an account:
    (1) Name;
    (2) Date of birth, for an individual;
    (3) Address, which shall be:
    (i) For an individual, a residential or business street address;
    (ii) For an individual who does not have a residential or business 
street address, an Army Post Office (APO) or Fleet Post Office (FPO) 
box number, or the residential or business street address of next of 
kin or of another contact individual; or
    (iii) For a person other than an individual (such as a corporation, 
partnership, or trust), a principal place of business, local office or 
other physical location; and
    (4) Identification number, which shall be:
    (i) For a U.S. person, a taxpayer identification number; or
    (ii) For a non-U.S. person, one or more of the following: 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.


    Note to paragraph (b)(2)(i)(A)(4)(ii):
    When opening an account for a foreign business or enterprise 
that does not have an identification number, the mutual fund must 
request alternative government-issued documentation certifying the 
existence of the business or enterprise.


    (B) Exception for persons applying for a taxpayer identification 
number. Instead of obtaining a taxpayer identification number from a 
customer prior to opening an account, the CIP may include procedures 
for opening an account for a person that has applied for, but has not 
received, a taxpayer identification number. In this case, the CIP must 
include procedures to confirm that the application was filed before the 
person opens the account and to obtain the taxpayer identification 
number within a reasonable period of time after the account is opened.
    (ii) Customer verification. The CIP must contain procedures for 
verifying the identity of the customer, using the information obtained 
in accordance with paragraph (b)(2)(i) of this section, within a 
reasonable time after the account is opened. The procedures must 
describe when the mutual fund will use documents, non-documentary 
methods, or a combination of both methods as described in this 
paragraph (b)(2)(ii).
    (A) Verification through documents. For a mutual fund relying on 
documents, the CIP must contain procedures that set forth the documents 
that the mutual fund will use. These documents may include:
    (1) For an individual, unexpired government-issued identification 
evidencing nationality or residence and bearing a photograph or similar 
safeguard, such as a driver's license or passport; and
    (2) For a person other than an individual (such as a corporation, 
partnership, or trust), documents showing the existence of the entity, 
such as certified articles of incorporation, a government-issued 
business license, a partnership agreement, or trust instrument.

[[Page 25148]]

    (B) Verification through non-documentary methods. For a mutual fund 
relying on non-documentary methods, the CIP must contain procedures 
that describe the non-documentary methods the mutual fund will use.
    (1) These methods may include contacting a customer; independently 
verifying the customer's identity through the comparison of information 
provided by the customer with information obtained from a consumer 
reporting agency, public database, or other source; checking references 
with other financial institutions; and obtaining a financial statement.
    (2) The mutual fund's non-documentary procedures must address 
situations where an individual is unable to present an unexpired 
government-issued identification document that bears a photograph or 
similar safeguard; the mutual fund is not familiar with the documents 
presented; the account is opened without obtaining documents; the 
customer opens the account without appearing in person; and where the 
mutual fund is otherwise presented with circumstances that increase the 
risk that the mutual fund will be unable to verify the true identity of 
a customer through documents.
    (C) Additional verification for certain customers. The CIP must 
address situations where, based on the mutual fund's risk assessment of 
a new account opened by a customer that is not an individual, the 
mutual fund will obtain information about individuals with authority or 
control over such account, including persons authorized to effect 
transactions in the shareholder of record's account, in order to verify 
the customer's identity. This verification method applies only when the 
mutual fund cannot verify the customer's true identity using the 
verification methods described in paragraphs (b)(2)(ii)(A) and (B) of 
this section.
    (iii) Lack of verification. The CIP must include procedures for 
responding to circumstances in which the mutual fund cannot form a 
reasonable belief that it knows the true identity of a customer. These 
procedures should describe:
    (A) When the mutual fund should not open an account;
    (B) The terms under which a customer may use an account while the 
mutual fund attempts to verify the customer's identity;
    (C) When the mutual fund should file a Suspicious Activity Report 
in accordance with applicable law and regulation; and
    (D) When the mutual fund should close an account, after attempts to 
verify a customer's identity have failed.
    (3) Recordkeeping. The CIP must include procedures for making and 
maintaining a record of all information obtained under paragraph (b) of 
this section.
    (i) Required records. At a minimum, the record must include:
    (A) All identifying information about a customer obtained under 
paragraph (b)(2)(i) of this section;
    (B) A description of any document that was relied on under 
paragraph (b)(2)(ii)(A) of this section noting the type of document, 
any identification number contained in the document, the place of 
issuance, and if any, the date of issuance and expiration date;
    (C) A description of the methods and the results of any measures 
undertaken to verify the identity of the customer under paragraph 
(b)(2)(ii)(B) or (C) of this section; and
    (D) A description of the resolution of any substantive discrepancy 
discovered when verifying the identifying information obtained.
    (ii) Retention of records. The mutual fund must retain the 
information in paragraph (b)(3)(i)(A) of this section for five years 
after the date the account is closed. The mutual fund must retain the 
information in paragraphs (b)(3)(i)(B), (C), and (D) of this section 
for five years after the record is made.
    (4) Comparison with government lists. The CIP must include 
procedures for determining whether the customer appears on any list of 
known or suspected terrorists or terrorist organizations issued by any 
federal government agency and designated as such by the Department of 
the Treasury in consultation with the federal functional regulators. 
The procedures must require the mutual fund to make such a 
determination within a reasonable period of time after the account is 
opened, or earlier, if required by another federal law or regulation or 
federal directive issued in connection with the applicable list. The 
procedures must also require the mutual fund to follow all federal 
directives issued in connection with such lists.
    (5)(i) Customer notice. The CIP must include procedures for 
providing mutual fund customers with adequate notice that the mutual 
fund is requesting information to verify their identities.
    (ii) Adequate notice. Notice is adequate if the mutual fund 
generally describes the identification requirements of this section and 
provides the notice in a manner reasonably designed to ensure that a 
customer is able to view the notice, or is otherwise given notice, 
before opening an account. For example, depending on the manner in 
which the account is opened, a mutual fund may post a notice on its 
website, include the notice on its account applications, or use any 
other form of written or oral notice.
    (iii) Sample notice. If appropriate, a mutual fund may use the 
following sample language to provide notice to its customers:

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT

    To help the government fight the funding of terrorism and money 
laundering activities, Federal law requires all financial 
institutions to obtain, verify, and record information that 
identifies each person who opens an account.
    What this means for you: When you open an account, we will ask 
for your name, address, date of birth, and other information that 
will allow us to identify you. We may also ask to see your driver's 
license or other identifying documents.

    (6) Reliance on other financial institutions. The CIP may include 
procedures specifying when a mutual fund will rely on the performance 
by another financial institution (including an affiliate) of any 
procedures of the mutual fund's CIP, with respect to any customer of 
the mutual fund that is opening, or has opened, an account or has 
established a similar formal business relationship with the other 
financial institution to provide or engage in services, dealings, or 
other financial transactions, provided that:
    (i) Such reliance is reasonable under the circumstances;
    (ii) The other financial institution is subject to a rule 
implementing 31 U.S.C. 5318(h) and is regulated by a federal functional 
regulator; and
    (iii) The other financial institution enters into a contract 
requiring it to certify annually to the mutual fund that it has 
implemented its anti-money laundering program, and that it (or its 
agent) will perform the specific requirements of the mutual fund's CIP.
    (c) Exemptions. The Commission, with the concurrence of the 
Secretary, may, by order or regulation, exempt any mutual fund or type 
of account from the requirements of this section. The Commission and 
the Secretary shall consider whether the exemption is consistent with 
the purposes of the Bank Secrecy Act and is in the public interest, and 
may consider other appropriate factors.
    (d) Other requirements unaffected. Nothing in this section relieves 
a mutual fund of its obligation to comply with any other provision in 
this part, including provisions concerning information that must be 
obtained,

[[Page 25149]]

verified, or maintained in connection with any account or transaction.

    Dated: April 28, 2003.
James F. Sloan,
Director, Financial Crimes Enforcement Network.

    In concurrence:

    By the Securities and Exchange Commission.


    Dated: April 29, 2003.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11018 Filed 5-8-03; 8:45 am]
BILLING CODE 4810-02-P; 8010-01-P