MEMORANDUM

TO:	Public Comment File No. S7-26-02
FROM:	Deborah F. Silberman Office of Regulatory Policy Division of Investment Management SEC
DATE:	October 10, 2002

As a follow-up to their September 27, 2002 meeting with staff of the SEC and the Department of the Treasury, Frances Stadler and Bob Grohowski from the Investment Company Institute ("ICI") submitted to the U.S. Securities and Exchange Commission, by e-mail dated October 4, 2002, further recommendations on two issues presented by the rule proposal regarding customer identification programs for mutual funds ("Proposed CIP Rule")¹: (1) the treatment of exchanges and analogous transactions under the rule; and (2) the requirement to keep records of discrepancies in identifying information. Copies of these items are attached. The e-mail and recommended rule text are attached.

Ms. Stadler and Mr. Grohowski (and Kathy Joaquin, on October 8) spoke by telephone on October 7 and 8, 2002 with SEC staff about the cost-benefit analysis in the proposed rule. Mr. Grohowski submitted additional information via e-mail (attached). Staff of the SEC Division of Investment Management participating in the telephone calls were: Martha Peterson (October 7); Deborah Silberman (October 7 and 8); Robert Kim (October 8). The ICI provided information on: hours and costs associated with systems modifications necessary to revise application forms in accordance with the proposed rule; hours and costs, and additional cost per account, for collecting identifying information in accordance with the proposed rule; hours and costs of the ongoing recordkeeping burden; and the appropriate figures to use for number of customers and number of new accounts per year.

Attachments

________________________

1	Release No. IC-25657 (July 12, 2002), 67 Fed. Reg. 48318 (July 23, 2002).

Attachment A:

From: Stadler, Frances [mailto:frances@ici.org]
Sent: Friday, October 04, 2002 2:22 PM
To: `jonesch@sec.gov'
Cc: `plazer@sec.gov'; Tyle, Craig; Grohowski, Bob
Subject: CIP Rule Follow-up Recommendations

Hunter,

As suggested at the meeting last Friday on the proposed mutual fund CIP rule, we are providing in the attachment to this message our recommendations on two issues: (1) the treatment of exchanges and analogous transactions under the rule; and (2) the requirement to keep records of discrepancies in identifying information.

Please call me at 326-5822 or Bob Grohowski at 371-5430 if you have any questions.

Frances

Frances M. Stadler
Deputy Senior Counsel
Investment Company Institute
1401 H Street, N.W.
Washington, D.C. 20005
(202) 326-5822
frances@ici.org

Attachment B:

Mon 10/7/02 3:20 PM

FROM: Bob Grohowski (rcg@ici.org)
TO: Deborah Silberman (silbermand@sec.gov)
Cc: Frances Stadler (frances@ici.org)
SUBJECT: Follow-up to this afternoon's call

Deb,

I spoke with one of our economists about the figures on page 61 of the Fact Book with regard to the total number of mutual fund accounts. We do not have any further breakdown of the figures. The number is derived from answers to our quarterly survey of member complexes and merely represents the gross number of accounts at the fund level. No distinction is made in the survey with respect to individual vs. entity vs. institutional accounts. I also learned that these figures are, in fact, fairly useful for the CIP analysis. They do not look through institutional accounts -- an omnibus position or 401(k) plan would each count as a single account -- but do count each separate fund owned by the same shareholder as a separate account. The figures thus are an accurate reflection of the number of accounts in the industry strictly from the mutual fund perspective.

Also, our 1991 profile of mutual fund shareholders included a statistic that the average mutual fund shareholder owns 7 different funds (with a median of 5). Unfortunately, however, the survey did not ask how many different fund complexes were represented in the funds owned by the respondents. If you haven't seen it, the survey can be found at http://www.ici.org/pdf/rpt_profile01.pdf. The statistic is included in Figure 42.

Best regards,

Bob

Bob Grohowski
Associate Counsel
Investment Company Institute
phone: 202-371-5430
fax: 202-326-5841
rcg@ici.org

Attachment C:

-----Original Message-----

From: Grohowski, Bob [mailto:rcg@ici.org]
Sent: Tuesday, October 08, 2002 1:08 PM
To: `silbermand@sec.gov'
Subject: FW: MF Industry - New Account Data

Deb, here's the information that Kathy Joaquin had sent to Dave Fielder earlier this year. We look forward to talking to you about it at 2:30. <<newacctrevised.xls>>

* * * * * * * * * * * * * * *

--Bob

-----Original Message-----

From: Joaquin, Kathy
Sent: Thursday, June 20, 2002 3:09 PM
To: `Dave Fielder (E-mail)'
Cc: Stadler, Frances; Grohowski, Bob
Subject: RE: MF Industry - New Account Data

Dave - I received the revised data already! Attached is the updated spreadsheet which now contains the total assets reported by the external providers. Please note that the new accounts reported has remained unchanged. However an adjustment was made to the total accounts reported by the provider which has been updated to the spreadsheet. Please let me know if you have any questions.

Best regards,

Kathy

<<newacctrevised.xls>>

-----Original Message-----

From: Joaquin, Kathy
Sent: Thursday, June 20, 2002 2:02 PM
To: Dave Fielder (E-mail)
Cc: Stadler, Frances; Grohowski, Bob
Subject: MF Industry - New Account Data

Dave - please find attached the Excel spreadsheet containing the industry new account data we discussed. I will forward you an updated spreadsheet detailing total assets for the external providers as soon as I receive the outstanding information I requested (hopefully within the next day or two). Please do not hesitate to call if you have any questions regarding the attached or if we can be of further assistance.

Many thanks for agree to speak at our upcoming ICI Transfer Agent Advisory Committee & Money Laundering Rules Working Group meeting on July 17^th here at the ICI in the David Silver Conference Room. The group will be meeting from 3:00 to 5:00 pm - we have you tentatively scheduled for 4:00 pm, but will touch base a week or two before the meeting to confirm the details.

Best regards,

Kathy

<< File: newacct.xls >>

Kathleen C. Joaquin, CPA
Director - Transfer Agency
& International Operations
Investment Company Institute
202-326-5930
kjoaquin@ici.org

Clarification Regarding Exchanges

To clarify the statement in the proposing release dealing with exchanges, we recommend either (1) amending the final rule and providing an explanation in the adopting release, or (2) providing clarification in the adopting release without amending the rule. Each of these alternatives is set forth below.

Alternative #1

Section 103.131(c)(2) would be amended as follows:

(2) Limited exceptions.

(i) In the case of a person other than a natural person that has applied for, but has not received, an employer identification number, the CIP may allow such information to be provided within a reasonable period of time after the account is established, if the mutual fund obtains a copy of the application for the employer identification number prior to such time.


(ii) Paragraph (c)(1) shall not apply to an existing customer that purchases shares of another mutual fund within the same fund complex for the same type of account. For these purposes, a "fund complex" means any two or more mutual funds that hold themselves out to investors as related companies for purposes of investment and investor services, and (A) that have a common investment adviser or principal underwriter, or (B) the investment adviser or principal underwriter of one of the mutual funds is an affiliated person as defined in section 2(a)(3) of the Investment Company Act of 1940 [15 U.S.C. 80a-2(a)(3)] of the investment adviser or principal underwriter of each of the other mutual funds.

[Note: The proposed definition of "fund complex" is identical to the definition of "group of investment companies" in Rule 11a-3 under the Investment Company Act of 1940, except that we have replaced certain references to "registered open-end investment companies" and "companies" with "mutual funds." We believe this definition would be appropriate because Rule 11a-3 deals with offers of exchange by open-end investment companies.]

A conforming amendment would be made to the first sentence of Section 103.131(d) as follows:

(d) Required verification procedures. The CIP shall include procedures for verifying the identity of customers for whom the mutual fund is required to obtain identifying information pursuant to paragraph (c) of this section, to the extent reasonable and practicable, using information obtained pursuant to paragraph (c).

The adopting release should contain the following explanation:

The Joint NPRM indicated that, after the effective date of the rule, a shareholder who exchanges shares of one fund for shares of another fund within the same account (or initiates any other transaction that does not involve the opening of a separate account) does not become a "customer" for purposes of the rule. Commenters pointed out that some exchanges involve the opening of a separate account, since a different account number may be assigned to the shareholder with respect to the second fund. Treasury and the Commission agree that a shareholder who exchanges shares of one fund for shares of another fund within the same fund complex should not become a ``customer'' for the purpose of this rule, regardless of whether the exchange transaction involves the opening of a separate account. Following the same logic, an existing fund shareholder who purchases shares of another fund in the same fund complex for the same type of account, and thereby opens an identically registered account with respect to the second fund, also should not become a "customer" subject to the rule's requirements when they open the subsequent account. To address both of these scenarios, a provision has been added to the final rule that excepts from the requirements of paragraph (c) of the rule an existing mutual fund customer that purchases shares of another mutual fund within the same fund complex for the same type of account (whether through an exchange or otherwise). In addition, a conforming amendment has been made to paragraph (d).

Alternative #2

To make a clarification in the adopting release without amending the rule, we would suggest the following language:

The Joint NPRM indicated that, after the effective date of the rule, a shareholder who exchanges shares of one fund for shares of another fund within the same account (or initiates any other transaction that does not involve the opening of a separate account) does not become a "customer" for purposes of the rule. Commenters pointed out that some exchanges involve the opening of a separate account, since a different account number may be assigned to the shareholder with respect to the second fund. Therefore, Treasury and the Commission wish to clarify that a shareholder who exchanges shares of one fund for shares of another fund within the same fund complex does not become a ``customer'' for the purpose of this rule, regardless of whether the exchange transaction involves the opening of a separate account. Similarly, an existing fund shareholder who purchases shares of another fund in the same fund complex for the same type of account, and thereby opens an identically registered account with respect to the second fund, does not become a "customer" subject to the rule's requirements when they open the subsequent account. For purposes of this clarification, we intend the term "fund complex" to mean two or more mutual funds that hold themselves out to investors as related companies for purposes of investment and investor services, and (1) that have a common investment adviser or principal underwriter, or (2) the investment adviser or principal underwriter of one of the mutual funds is an "affiliated person" as defined in section 2(a)(3) of the Investment Company Act of 1940 of the investment adviser or principal underwriter of each of the other mutual funds.

Clarification Regarding Recordkeeping

With regard to the requirement to make and maintain records of the resolution of discrepancies in identifying information, we recommend that the adopting release contain the following:

The Joint NPRM included a requirement that mutual funds make and maintain records of the resolution of any discrepancy in the identifying information obtained. Commenters requested that the final rule incorporate a materiality standard so that it would not be necessary for mutual funds to make and maintain records regarding the resolution of minor discrepancies, such as typographical errors. The provision is unchanged in the final rule. Treasury and the Commission note, however, that because the requirement applies to the resolution of a discrepancy "in the information obtained," a mutual fund is not required to make and maintain records of the resolution of a discrepancy that resulted from a data entry or other error on the part of an employee of the fund or its agent. These types of errors would not involve discrepancies in the information obtained, but merely discrepancies in the processing of that information.

Attachment E:

Industry New Accounts - 2001 Open-end Mutual Funds
	New Accounts 2001		% Accts	Total Accounts 12/31/2001		% Total Accts	Total Assets (in millions) 12/31/2001		% Total Assets
DST/BFDS/NFDS & PFPC	27,114,867	(a.)	20.0%	135,873,279	(a.)	54.8%	$4,248,683	(a.)	60.9%
Remainder of Industry				111,967,889		45.2%	$2,726,293		39.1%
Industry Totals		(b.)		247,841,168	(c.)	100.0%	$6,974,976	(c.)	100.0%
Notes: (a.): External transfer agents provided data for full service and remote client base. New account data includes exchange purchase transactions into new accounts, where new account application may not be required. Omnibus/street name sub accounts are included in data reported only to the extent the underlying shareholder account data is disclosed to the fund. Data also includes retirement plan accounts. (b.): Total industry new accounts opened in 2001 may be estimated based on % of New Accounts to Total Accounts as reported by external transfer agents. (c.): Source - 2001 ICI Mutual Fund Fact Book.