[Federal Register Volume 73, Number 214 (Tuesday, November 4, 2008)]
[Proposed Rules]
[Pages 65569-65571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26202]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA77


Financial Crimes Enforcement Network; Withdrawal of the Notice of 
Proposed Rulemaking; Anti-Money Laundering Programs for Unregistered 
Investment Companies

AGENCY: Financial Crimes Enforcement Network, Treasury.

ACTION: Withdrawal of notice of proposed rulemaking.

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[[Page 65570]]

SUMMARY: The Financial Crimes Enforcement Network (``FinCEN'') is 
withdrawing the notice of proposed rulemaking, dated September 26, 
2002, in which FinCEN proposed requiring unregistered investment 
companies--such as hedge funds, commodity pools, and similar investment 
vehicles--to establish and implement anti-money laundering programs.

DATES: The withdrawal is effective November 4, 2008.

FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs 
Division, Financial Crimes Enforcement Network, (800) 949-2732.

SUPPLEMENTARY INFORMATION:

I. Background

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism Act of 2001 (the ``USA PATRIOT Act''), 
Public Law 107-56. Title III of the USA PATRIOT Act amended the anti-
money laundering provisions of the BSA, which is codified at 12 U.S.C. 
1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314, 5316-5332. The 
amendments were designed to promote the prevention, detection, and 
prosecution of international money laundering and terrorist financing.
    Regulations implementing the Bank Secrecy Act appear at 31 CFR Part 
103. The authority of the Secretary of the Treasury (``the Secretary'') 
to administer the Bank Secrecy Act and its implementing regulations has 
been delegated to the Director of the Financial Crimes Enforcement 
Network.\1\
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    \1\ Accordingly, references herein to the Secretary's authority 
apply equally to the Director of FinCEN.
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    Section 352 of the USA PATRIOT Act amended section 5318(h) of the 
BSA. Section 352 requires every financial institution to establish an 
anti-money laundering program that includes, at a minimum, (1) The 
development of internal policies, procedures, and controls; (2) the 
designation of a compliance officer; (3) an ongoing employee training 
program; and (4) an independent audit function to test programs. 
Section 352 authorizes the Secretary, after consulting with the 
appropriate Federal functional regulator,\2\ to prescribe minimum 
standards for anti-money laundering programs, and to exempt from the 
application of those standards any financial institution that is not 
subject to rules implementing the BSA.
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    \2\ Unregistered investment companies--except commodity pools 
operated by a commodity pool operator that is registered or required 
to be registered with the Commodity Futures Trading Commission--are 
not functionally regulated.
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    Investment companies are defined as financial institutions in the 
BSA.\3\ On April 29, 2002, FinCEN published an interim final rule 
requiring mutual funds--a category of investment company--to establish 
and implement anti-money laundering programs.\4\ On September 26, 2002, 
FinCEN issued a notice of proposed rulemaking, proposing to require 
``unregistered investment companies'' to establish and implement anti-
money laundering programs.\5\ In November 2002, FinCEN temporarily 
exempted certain financial institutions, including investment companies 
that were not mutual funds as that term is defined in the anti-money 
laundering program rule for mutual funds,\6\ from the requirement to 
establish and implement an anti-money laundering program.\7\
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    \3\ 31 U.S.C. 5312(a)(2)(I).
    \4\ Anti-Money Laundering Programs for Mutual Funds, 67 FR 21117 
(Apr. 29, 2002).
    \5\ Anti-Money Laundering Programs for Unregistered Investment 
Companies, 67 FR 60617 (Sep. 26, 2002).
    \6\ See 31 CFR 103.130(a) (a ``mutual fund'' is an ``open-end 
company,'' as the term is defined in the Investment Company Act of 
1940).
    \7\ 31 CFR 103.170. See also Anti-Money Laundering Programs for 
Financial Institutions, 67 FR 67547 (Nov. 6, 2002).
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II. The 2002 Notice of Proposed Rulemaking and Subsequent Developments

A. The 2002 Notice of Proposed Rulemaking

    In its September 2002 notice of proposed rulemaking, FinCEN 
proposed to define the term ``unregistered investment company'' as (1) 
An issuer that, but for certain exclusions, would be an investment 
company as that term is defined in the Investment Company Act of 1940, 
(2) a commodity pool, and (3) a company that invests primarily in real 
estate and/or interests in real estate. FinCEN proposed to capture 
within the definition so-called hedge funds, private equity funds, 
venture capital funds, commodity pools, and real estate investment 
trusts with total assets or subscriptions of $1,000,000 or more.
    FinCEN proposed to exclude, among other things, any issuer that 
subjected its participants to a two-year lock-up period. Because 
unregistered investment companies are not subject to Federal functional 
regulation,\8\ FinCEN proposed requiring these companies to file a 
notice so that FinCEN and agencies conducting BSA compliance 
examinations of unregistered investment companies could readily 
identify such companies.
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    \8\ Commodity pools, however, may be operated by a CFTC-
regulated commodity pool operator. See 7 U.S.C. 1a(5) (defining a 
``commodity pool operator'' as ``any person engaged in a business 
that is of the nature of an investment trust, syndicate, or similar 
form of enterprise, and who * * * solicits, accepts, or receives 
from others, funds, securities, or property * * * for the purpose of 
trading in any commodity for future delivery on or subject to the 
rules of any contract market or derivatives transaction execution 
facility * * *'').
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    The comment period closed on November 25, 2002. FinCEN received 34 
comments in response to the notice of proposed rulemaking from law 
firms, unregistered investment companies, investment advisers, bank 
holding companies, trade groups, and a registered futures association. 
These comments addressed many aspects of FinCEN's proposal.
    Significantly, comments were focused on the breadth of the proposed 
definition of ``unregistered investment company,'' including the 
proposed inclusion of commodity pools that are operated by CFTC-
regulated commodity pool operators; the proposed inclusion of real 
estate investment companies; and the proposal to exclude from the 
definition any company that subjects its participants to a two-year 
lock-up period. Comments also were focused on the minimum contact 
provisions proposed by FinCEN, under which certain offshore funds would 
be obligated to comply with the rule; the ability of funds to outsource 
anti-money laundering program obligations to third-party 
administrators; and the proposed notice requirement.

B. Subsequent Developments

    In June 2007, FinCEN announced that it would be taking a fresh look 
at BSA regulation to ensure that it is being applied efficiently and 
effectively across the industries that FinCEN regulates and the 
industries FinCEN has proposed to regulate. As part of that initiative, 
FinCEN is considering whether and to what extent it should impose 
requirements under the BSA on unregistered investment companies.
    As it considers its approach to unregistered investment companies, 
FinCEN has determined that it will withdraw the notice of proposed 
rulemaking that was published in September 2002. Given the passage of 
time, FinCEN has determined that it will not proceed with an anti-money 
laundering program requirement for any entity within the proposed 
definition of unregistered investment company without publishing a new 
proposal. This will give industry and other interested parties an 
opportunity to provide comment on the contents of any

[[Page 65571]]

such proposal, as it may be affected by any developments since 2002 in 
industry operations as well as functional and BSA regulation.
    Finally, since the time that the notice of proposed rulemaking was 
published, FinCEN has concluded the major rulemakings required by the 
USA PATRIOT Act for banks, broker-dealers, and futures commission 
merchants. Each of these institutions is subject to a comprehensive set 
of regulations under the BSA including, among other things, the 
obligation to establish and implement an anti-money laundering 
program,\9\ the obligation to establish and implement a customer 
identification program,\10\ the obligation to establish and implement a 
special due diligence program for foreign correspondent accounts and 
foreign private banking accounts,\11\ the obligation to detect and 
report suspicious activity,\12\ and the obligation to file currency 
transaction reports.\13\
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    \9\ 31 CFR 103.120.
    \10\ 31 CFR 103.121-103.123.
    \11\ 31 CFR 103.176 and 103.178.
    \12\ 31 CFR 103.17-103.19.
    \13\ 31 CFR 103.22.
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    The financial transactions of unregistered investment companies and 
their participants must be conducted through other financial 
institutions that are subject to BSA requirements. Assets within any of 
these unregistered investment pools typically are carried with these 
financial institutions. Thus, as FinCEN continues to consider the 
extent to which BSA requirements should be imposed on unregistered 
investment companies, their activity is not entirely outside the 
current BSA regulatory regime.

III. Withdrawal of the Notice of Proposed Rulemaking

    For the foregoing reasons, the notice of proposed rulemaking, in 
which FinCEN proposed requiring unregistered investment companies to 
establish and implement anti-money laundering programs, as published in 
the Federal Register on September 26, 2002 (67 FR 60617), is hereby 
withdrawn.

    Dated: October 29, 2008.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
[FR Doc. E8-26202 Filed 11-3-08; 8:45 am]
BILLING CODE 4810-02-P