100 East Pratt Street
Baltimore, Maryland 21202
Sent via Electronic Mail
September 6, 2002
Judith E. Starr, Chief Counsel
Office of the Chief Counsel
Financial Crimes Enforcement Network
Department of the Treasury
Attention: Section 326 Mutual Fund Rule Comments
Electronic Mail Address: email@example.com
Jonathan G. Katz
Securities and Exchange Commission
Subject: File No. S7-26-02
Electronic Mail Address: firstname.lastname@example.org
Re: Request for Comments on Proposed Rule Regarding Customer Identification Programs for Mutual Fund
Dear Ms. Starr and Mr. Katz:
We are writing on behalf of T. Rowe Price Associates, Inc. ("Price Associates") in response to the request by the Department of the Treasury, through the Financial Crimes Enforcement Network, and the Securities and Exchange Commission for comments on the proposed rule implementing Section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act ("Act").1 We generally support the proposed rule to aid in combating money laundering and terrorist activity in the mutual fund industry through implementation of a "Customer Identification Program" ("CIP"). However, we have comments relating to: definition of "customer;" exchanges of fund shares; requirement to collect residential addresses for natural persons; identification number issues associated with non-U.S. persons; notice to customers; recordkeeping requirements; role of mutual fund boards; searches of government lists of known or suspected terrorists; and an implementation period for the rule.
Price Associates, and certain of its affiliates, are registered investment advisers under the Investment Advisers Act of 1940, with assets under management of approximately $148.8 billion as of June 30, 2002. Price Associates and one of its affiliates, T. Rowe Price International, Inc. (the "Price Advisers") are the sponsors of, and advisers to, a family of over 90 open-end registered investment companies (the "Price Funds"), with more than eight million individual and institutional accounts. Therefore, Price Associates has a keen interest in mutual fund regulatory issues. The Price Associates family of companies also provide investment, brokerage, banking, and trust services for individual and institutional accounts. As such, we have an interest in achieving uniformity to the greatest degree possible among the final CIP rules issued by the various agencies impacting our multiple lines of business. Accordingly, we appreciate the opportunity to comment on the proposed rule.2 Many of our comments concur with the comments made by the Investment Company Institute ("ICI") in its letter to the SEC and Treasury on the proposed CIP Rule for Mutual Funds dated September 6, 2002 ("ICI Comment Letter").
A customer is defined in the proposed rule as follows:
(i) Any mutual fund shareholder of record who opens a new account with a mutual fund; and
(ii) Any person authorized to effect transactions in the shareholder of record's account with a mutual fund.
We are concerned that the inclusion of any persons authorized to effect transactions in the shareholder's account in the proposed definition may be overly broad such that it is impractical and thereby could hinder the mutual fund's (or its transfer agent's) administration of the rule with no measurable benefit to be realized. We believe the definitions goes beyond the language and intent of the Act in this regard, particularly in light of the Act's frequent use of the terms "customer" and "account opening," as those terms are commonly understood.
Therefore, we recommend that the definition of customer be limited to shareholders of record who open new accounts and individuals who open new accounts on behalf of or for the benefit of shareholders of record. For those individuals who open new accounts on behalf of or for the benefit of shareholders of record we also recommend that a risk-based approach be permitted to determine if the individual should be included as "customers" under the mutual fund's CIP. We believe that the inclusion of all persons with transaction authority over an account is not supported by the Act or its legislative history and should be removed from the final rule. When information concerning the shareholder of an account has been collected and verified under a CIP (after providing notice to the person), and a risk-based assessment has been made on whether or not to provide notice, collect and verify information concerning any other individual who opens an account in the name or on behalf of the record owner, there is questionable value, but real and substantial burdens, in providing notice, collecting and verifying information for all persons with transaction authority over the account. We believe that the approach we advocate strikes an appropriate and workable balance, focusing the CIP on the account-opening process as stated in Section 326 of the Act and widening the focus as appropriate to other areas, such as account activity, through a mutual fund's anti-money laundering program under Section 352 of the Act.
A risk-based concept is discussed in connection with the verification requirements, but not in connection with the collection requirements.3 The burdens and delays associated with the collection and notice requirements cannot be overstated in many situations where there would be little to no benefit in the goals of combating money-laundering or other crimes.4 The market volatility of the past months has shown that delays in processing new accounts and transactions can have real consequences to mutual funds as well as their customers.
For example, consider a mutual fund's receipt by mail to open an account by a court appointed custodian on behalf of an individual (the shareholder). A certified copy of the court order appointing the custodian is included, as is identifying information concerning the individual. Under the proposed rule, the mutual fund (through its transfer agent) could not open the account (presumably even if delay would cause the transfer agent or custodian to violate the order) until the transfer agent: (i) provides notice to the custodian that it is requesting four pieces of information concerning the custodian as set forth in Section 103.131(c)(1); and (ii) collects the four pieces of required information. Under a risk-based approach, however, a mutual fund could make a determination that the judicial safeguards and oversight associated with a court-appointed custodian mitigates against treating such a person as a "customer" under its CIP.5
Another example of the usefulness of a risk-based approach to determine whether the person opening the account, if other than a shareholder, should be treated as a customer, is in the area of accounts established for entities such as broker-dealers, advisors or corporations. If the shareholder is a broker dealer, adviser or corporation with whom the mutual fund has had prior dealings, is familiar with affiliated companies or is a large publicly traded company, the mutual fund should be allowed to assess the relevant risk factors relating to such shareholder to determine the extent to which further data needs to be collected and validated concerning the individuals (e.g., the Chief Financial Officer) who opens the account on behalf of the shareholder. In such a case, the shareholder (the broker, entity or adviser) would be required to be verified but a risk based decision could be made with respect to the person opening the account on behalf of the shareholder.
In light of all of these concerns, we therefore recommend that the definition of "customer" in 103.131(a)(3) be revised to read:
"(4) Customer means:
(i) Any mutual fund shareholder of record who opens a new account with a mutual fund; and
(ii) Any person who opens an account with a mutual fund on behalf of or for the benefit of shareholders of record, if under a mutual fund's customer identification program the person is a customer."
A new subsection (5) should then be added to 103.131 (b) for the elements of a CIP to include:
"(5) The risk-based circumstances under which a person who opens an account with the mutual fund on behalf of or for the benefit of shareholders of records will be treated as a customer; and"
Additionally, to the extent that Treasury and the SEC do not implement our recommendation to delete the "authority to effect transactions" language in the definition as proposed, we strongly recommend that a risk-based standard be adopted for such persons as well. Given that a substantial number of individuals often are granted authority to effect transactions on mutual fund accounts, and that these persons often change over time without effecting the ownership of record, we believe an inflexible rule treating these persons as customers under a mutual fund's CIP would lead to a significant number of delays in processing transactions in these accounts.6
Moreover, we question whether the treatment of each and every such individual as customers is useful in addressing money laundering and terrorist concerns.
Finally in this area, we also ask that the final rule make clear that a mutual fund's customers do not include participants of a qualified retirement plan (or other qualified benefit plan) customer. This was stated in the legislative history of the Act and in the Supplementary Information to the proposed rule for mutual funds.7 In the interests of uniformity, we ask that this be made clear for all financial service providers. There are many layers of regulation and safeguards surrounding the establishment and funding of qualified retirement and benefit plans under federal law and regulation. Of course, the mutual fund would be required to provide notice, collect and verify information concerning the qualified plan itself, but there is little usefulness in providing notice, collecting, and verifying information concerning what may be thousands of individual plan participants.8
The Release states that "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 the purpose of this rule."9
As a technical matter, exchanges do not occur within a single mutual fund account. Instead, shareholders of the Price Funds have an account (with a separate account number) for each Price Fund in the Price Fund family. Telephone and computer exchanges are permitted among the Price Funds for identically registered accounts.
Given the statement in the Release about exchanges, we do not believe that it was intentional that an exchange into another Price Fund would create a customer under the Rule. We therefore request that Treasury and the SEC clarify in the release adopting the final rule that exchanges of fund shares in a fund family would not cause a shareholder to become a customer.
We concur with the ICI's Comment Letter that intermediated accounts, where the intermediary has identification and verification responsibilities under the Act, should be treated similar to Omnibus accounts. This would be consistent with the risk-based approach generally taken in both the interim AML program rule10 and the Proposed Rule.11 As the ICI points out, an intermediary required to have an AML program under Section 352 of the Act is involved in opening the account and maintains an ongoing client relationship with the shareholder. In some intermediated accounts, a mutual fund shareholder may be a "customer" (as defined in the Proposed Rule) of both the mutual fund and the intermediary. Consequently, the CIP rule as proposed could require both the fund and the intermediary to perform identification and verification on those shareholders. If the customer has been appropriately identified and verified once, there is no reason to have another financial institution repeat the same procedures.
Obtaining the necessary information from either the intermediary or the customer and providing notice to the customer in order to comply with the Proposed Rule may prove to be difficult and, in any event, likely would lead to a delay in opening the customer's account.12 Customers would be exposed to market risk (i.e., the risk of being out of the market) during this delay. We believe that this exposure to market risk is an unnecessary burden on these shareholders.
For all of these reasons, we request that Treasury and the SEC clarify that in instances where another entity, such as a broker-dealer, has the obligation to perform identification and verification, funds are not required to perform duplicative identification and verification on those customers.
The proposal asked for comments on how mutual funds can comply with the requirement to obtain a residential address for natural persons who lack a permanent address. We believe this is a problem and that a mailing address alone should be sufficient for persons who lack a permanent address. For example, we encounter persons who reside full-time on boats, which mayor may not have a permanent mooring "address," thus necessitating legitimate reliance on a P.O. Box or other service to collect and forward mail. Of much greater frequency, we find that members of the military commonly use the appropriate "APO" address assigned to them by the military since the meaning of "residence" is not always applicable in the traditional sense.
Because under the proposed rule accounts cannot even be opened before a residential address is obtained, the lack of a permanent residential address for natural persons creates an unduly harsh result that we do not believe was intended under the Act, and we ask that changes be made accordingly.
We believe the rule as proposed may make it difficult, if not impossible, for some legitimate non-U.S. persons, both natural and non-natural, to invest in a U.S. mutual fund because they are unable to provide the identification number required under the rule. For this reason, we believe the rule should be expanded to permit the mutual fund to collect a foreign equivalent of a tax-payer identification number as well as for foreign entities a number and country of issuance of any other government document without the requirement of a photograph or similar safeguard, which is impracticable for entities. We therefore recommend that 103.131(e)(iv)(B) under Identification Numbers be revised to read:
(B) A taxpayer identification number or foreign equivalent, 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 from each natural person that is not a U.S. person.
The proposed rule states that the CIP must include procedures "for providing customers with adequate notice that the mutual fund is requesting information to verify their identities." We request that the rule be revised to reflect that notice to a legal representative of a shareholder of record or in the case of multiple shareholders, notice to anyone of them, is sufficient. We believe the proposed rule is overly broad and may lead to unintended consequences, even if the notice is printed on the application, an owner who does not sign the application (e.g., an account opened under a power of attorney for the named principal, a Uniform Transfers to Minors Act account, etc.) the actual shareholder of record will not receive notice. We do not believe that Congress intended that the requirement to provide notice be absolute so as to leave financial service providers with no choice but to refuse to open accounts if notice could not be provided to each and every customer.
Many laws call for notice to customers in broad statutory language. Title V of the Gramm-Leach-Bliley Act mandates that mutual funds among others, provide notice concerning the mutual funds, with the notice to be provided "to consumers" at the time a customer relationship is formed and then on an annual basis. While one of the key purposes of that law is to provide notice, the SEC and other federal functional regulators recognized that a requirement to provide notice of privacy practices to each and every customer created an unworkable burden. In crafting the regulations to implement the law, the SEC and other regulators provided that in the case of joint accounts, all notice requirements are satisfied if notice is provided to anyone of the joint owners.13 Similarly in the case of legal representatives of customers, notice could be provided to the legal representative in lieu of the customer.14
We urge that the same standards be adopted for notice under the CIP proposed rule as such standards are well-established and create the right balance between the goal of providing notice as broadly possible without, however, creating an inflexible rule that may actually prevent the opening of an account or the adding of a person with transaction authority over the account. This could be accomplished by adding a second sentence to 103.131(f) to read:
"Such procedures may include provisions specifying that notice may be provided to the legal representative of a customer, or that in the case of an account established in the name of multiple persons, notice to anyone of them is sufficient."
As proposed, the rule requires retention of all records used for verification for a period of five years after the account is closed. We anticipate that the verification of shareholders will most effectively be done through the processing of all accounts opened on a particular day on exceptions reports. The rule as proposed would require retention of the exception reports until five years after all accounts opened on the particular day are closed, which would essentially lead to indefinite retention of these records. This requirement would be both burdensome and expensive.
More importantly, the indefinite retention of verification records does not seem necessary to achieve the legitimate policy goal of providing appropriate records to test for compliance with the CIP rule.15 Verification procedures could be tested by examining recent verification records; a complete history of exception reports does not seem necessary for this purpose.
Therefore, we ask that Section 103.131(h) be changed to require the records made or obtained pursuant to subsection (h)(l)(ii) be maintained for a period of five years from the date verification is performed.
In the area of resolving discrepancies, Section 103.131 (h)(3) of the proposed rule would require that the resolution of any discrepancy in the identifying information obtained pursuant to the CIP be retained for five years after the account associated with the information is closed. Minor discrepancies, such as typographical errors, often arise and are resolved during the account opening process. These discrepancies would not seem to be of interest or value for anti-money laundering compliance purposes. We therefore recommend that the final rule incorporate a materiality standard into Section 103.131(h)(3), such that the records retained pursuant to the rule need only reflect the resolution of material discrepancies in the information obtained pursuant to a CIP.
We concur with the recommendation in the ICI Comment Letter that the release accompanying the final CIP rule should clarify that the rule does not impose specific, ongoing review and/or monitoring responsibilities on fund boards. As the ICI points out, the Releases statement that "[t]he board should periodically assess the effectiveness of its CIP and should receive periodic reports regarding the CIP from the person or persons responsible for monitoring the fund's antimoney laundering program pursuant to 31 CFR 103.30(c)(3)"16 appears to impose specific, ongoing responsibilities on fund boards. Doing so in the context of mutual fund CIP requirements is inconsistent with the appropriate role of fund boards. It is well-recognized that the intended role of fund directors is to serve as "watchdogs," protecting fund shareholders by policing potential conflicts between the interests of shareholders and those of fund management.17 Having an effective CIP, while unquestionably important, does not raise any conflict of interest concerns. As such, the board's role in this context should be one of general oversight - the same as it is with respect to other compliance matters not involving potential conflicts of interest Imposing more specific obligations on the board would contravene the SEC's efforts to allow fund directors "to focus to a greater extent on what they do best -exercising business judgment in their review of interested party transactions and in their oversight of operational matters where the interests of an investment company and its adviser may diverge."18
We concur with the ICI's Comment Letter that the breadth of the proposed rule - to check any list prepared by any federal government agency - could result in inadvertent violations of the rule. And we agree with the ICI that Treasury or the SEC should act as a clearinghouse by formally (e.g., by rule or order) or informally (e.g., by posting on its web site) providing a catalog of the specific lists that broker-dealers and other financial institutions are required to check, at least with respect to compliance with the CIP rule.19 This would provide a level of certainty that would improve compliance and reduce associated costs.
We recognize the desire of Treasury and the SEC to implement the rule for customer information programs on a timely basis. However, we are concerned that, given the breadth of the rule, it is extremely burdensome for mutual funds to efficiently implement all of the operational and information technology related changes that the rule demands. While we are in continuing conversations with all of our systems service providers, the provider for the Price Funds, for example, has informed us that system changes under the rule as proposed relating to address fields and automated feeds to verification systems will take at least six months. Also, past experience with changes to our application forms (often necessitated as here by new legal requirements) has taught us that, despite substantial efforts to circulate revised forms, investors retain application forms obtained previously and attempt to use them for more than a year after new forms are released.
To minimize the disruption of services to our customers, we respectfully request that mandatory compliance with all provisions of the customer identification program rule be delayed for at least nine months after promulgation of the final rule. In the interim, mutual funds should be encouraged to make best efforts to comply.
We appreciate the opportunity to comment on the proposed rule. Should you have any questions about our comments, please call Laura Chasney at 410-345-4882.
Henry H. Hopkins
1 See 67 Fed. Reg. 48,318 (Jul. 23, 2002) (the "Release").
2 Other Price Associates' affiliates are submitting similar comment letters to appropriate agencies under the proposed CIP rules for broker-dealers, federally-regulated savings banks, and certain banks that do not have a federal functional regulator.
3 Section 103.131 (d) refers to implementation of verification procedures "to the extent reasonable and practicable."
4 We have found that systems changes will be required for various products offered by T. Rowe Price simply to capture the residential addresses of joint owners (when different) and for natural persons opening an account for another person. While in theory we could capture this information in paper format, it then would not be available for a systems feed to any automated database or other means used to verify the information. As companies that rely to a great extent on the mail, telephone, and Internet to open accounts and effectuate transactions, providing some risk-based flexibility in the verification portion of the proposed rule without similarly granting appropriate flexibility on the notice and collection portions is of little value.
5 On the other hand, a CIP could indicate that the custodian of a "Uniform Transfers to Minors Act" account is to be considered a "customer" because the custodian is not court-appointed and has considerable discretion over the account.
6 Consider a corporation whose employee with transaction authority over its mutual fund account gives notice that he is leaving. It is not uncommon in such situations to immediately remove the person from all accounts and name a new person. However, under the definition as proposed, the corporation would not be able to have a new employee named to conduct transactions until the mutual fund gave notice to the new employee and collected the four pieces of information. This would force fundamental changes in the way legitimate entities conduct business. Also, to the extent the normal verification procedures used by the mutual fund for natural persons involve credit reports, then the new employee's written (not telephonic) consent would be required under the federal Fair Credit Reporting Act since it is not the employee's personal account.
7 See, e.g., 67 Fed. Reg. 48,318, 48, 321 n. 14 (Jul. 23, 2002). While the example given in the legislative history was for a retirement plan holding mutual fund shares, the stated purpose-to mimic the approach used in the privacy rules promulgated under Title V of the Gramm-Leach-Bliley Act of 1999-applies to all financial service providers at issue here. H.R. Rep. 107-250, pt. 1, at 62. Indeed, it is specifically the case for investment companies and broker-dealers under the privacy rules. 17 C.F.R. § 248.3(g)(2)(viii).
8 Given the broad definition of "customer" in the proposed rule, we are concerned that participant elections of particular investment strategies or the request for a distribution or loan under plan rules may make all participants potential "customers."
9 Release, 67 Fed. Reg. at 48320.
10 Financial Crimes Enforcement Network; Anti-Money Laundering Programs for Mutual Funds, 67 Fed. Reg. 21117 (Apr. 29, 2002).
11 The Proposed Rule takes a risk-based approach in requiring that CIP procedures be based on the type of identifying information available and on an assessment of relevant risk factors including, among others, the manner in which accounts are opened, fund shares are distributed, and purchases, sales and exchanges are effected. See Section 103.l31(b) of the Proposed Rule.
12 The intermediary often may be reluctant to provide the information for business reasons. The customer likely would be confused and annoyed by such a request from a fund, having already provided the necessary information to the intermediary.
13 See, e.g., 17 C.F.R. § 248.9(g).
14 See, e.g., 17 C.F.R. § 248.3(g)(1).
15 Clearly, the recordkeeping requirements in the proposed rule also are intended to provide records to support future investigations relating to the account. However, we believe that identification records and records reflecting the resolution of material discrepancies are far more useful than verification records in this regard.
16 Release, 67 Fed. Reg. at 48323.
17 See, e.g., Role of Independent Directors of Investment Companies, SEC Release No. IC-24082.
18 Division of Investment Management, U.S. Securities and Exchange Commission, Protecting Investors: A Half Century of Investment Company Regulation, at 254 (1992).
19 We understand that the absence of a particular list on any such catalog would not absolve broker-dealers and other financial institutions from their compliance obligations with respect to that list. However, it would seem appropriate to limit the CIP rule to those lists identified by Treasury or the SEC.