NEW YORK - Mutual fund companies will have until March 31 to comment on a privacy provision in the Financial Services Modernization Act that will prevent fund companies from sharing customer information with third-party non-affiliates.
The law also allows mutual fund investors to "opt out" of internal direct marketing lists, said Federal Reserve Board officials and attorneys who spoke here last week at a symposium on the regulatory and strategic ramifications of the Financial Services Modernization Act.
The act, which goes into effect in the fall, allows fund investors to ask their fund complex or other financial services holding company not to share their name, address, phone number or personal account information with other subsidiaries or affiliates, the executives said.
"This rule will apply to an enormous number of financial institutions, and could even extend to a travel agency" or medical affiliate, said Oliver Ireland, associate general counsel at the Federal Reserve Board.
As it now stands, the law will require financial service companies to begin telling all new customers on Oct. 13 of their right to opt-out of having information about them shared with any affiliates or divisions of a financial services holding company, said John Dugan, a partner with Covington & Burling of Washington, D.C. Beginning Dec. 13, financial service companies will also have to tell all of their existing customers of this right, Dugan said.
As the law is written now, informing customers of their opt-out rights could become quite cumbersome and lengthy, Dugan said.
"We hope it won't look like the New York phone book," he said.
The privacy provision of the act does not specify how this opt-out right is to be communicated to customers, Dugan said. It could be done by handing a piece of paper containing the information to a customer, by mail or electronically, he said.
As simple as it may sound, it may not be that easy to implement, Dugan said.
Companies will need computer software and hardware systems to comply with the new rule and a database separating protected and non-protected customer lists, he said.
The law is also intended to make the opt out process easy for customers, Dugan said.
"Don't make the consumer write a letter," he said. "Let them check off or communicate electronically, or include a postmarked, self-addressed reply postcard."
Further complicating implementation of the act, a number of state legislators and attorney generals are taking advantage of a clause in it that allows them to enforce more rigid privacy provisions, speakers said.
Right now, 22 states are debating 35 such pieces of privacy legislation, said Roberta Meyer, senior counsel at the American Council of Life Insurers of Washington, D.C.
This proposed legislation could result in a myriad of privacy laws being in effect across the country, Meyer said. Complying with these laws could raise legal costs for mutual fund and other financial service companies, and end up hurting consumers with higher-priced products and services, she said.
Many state attorney generals are reversing the opt-out function, and may require financial service companies to get their customers to actively "opt-in" to be on shared customer lists, Meyer said.
State regulators in Idaho, Minnesota, Washington, California and New York are particularly keen on the opt-in, versus opt-out, approach, Meyer said.
Some state attorney generals are also considering barring financial service companies from sharing information among affiliates, as well as among non-affiliates, Meyer said. This would run counter to the original market liberalization intent of the act, she said.
"Clearly, there must be fair sharing of information among affiliates because it is so vitally important," Meyer said.
Her organization is currently telling regulators in states considering opt-in legislation or legislation that would prevent financial service holding companies from sharing customer information among affiliates, that such laws would run against the original intent of the law, Meyer said.