What do terrorists and mutual funds have in common? Neither wants the USA Patriot Act's "know-your-customer" rules to be implemented on its scheduled date of Oct. 25.
While the war on terror wages on abroad, and changes here in the United States are continuing to be made in an attempt to minimize security risks, some in the industry, including the Investment Company Institute (ICI), are finding that regulation is moving too fast.
The Patriot Act was passed last year in the wake of the terrorist attacks in September. The legislation was aimed at preventing terrorists from money laundering and help firms screen new customers more effectively.
Specifically, the new law requires fund companies and other investment firms to obtain an investor's Social Security number, or other government-issued identification number, as well as their official residential address. A P.O. box number will not do. These measures are aimed at thwarting terrorists looking to use or attack the stability of the U.S. economy, or abuse mutual funds, the stock market or other financial instruments to bankroll their misdeeds.
The ICI was scheduled to file a comment letter to the Securities and Exchange Commission and U.S. Treasury by last Friday, the end of the comment period for the ruling.
The SEC declined comment for this story. A spokeswoman for the Treasury Department said the agency is currently reviewing comments and has not made a decision about a possible grace period for fund companies to come into compliance.
Fidelity Investments of Boston and AIM of Houston also declined comment. A spokeswoman for Putnam Investments of Boston said that the firm currently is in compliance with the Patriot Act, although she would not give specifics on how much it is costing or how long it took the company to put changes into effect.
Letter of the Law Unclear
However, some in the fund industry claim that the implementation of the act, which is set to take effect one day shy of the one-year anniversary of its passage, is too soon. Others seek clarifications in the act's wording.
"It is the contention of the Institute that firms need more than the allotted time period to come up to standard," said Bob Grohowski, associate counsel with the ICI. While the comment letter was not finalized at press time, Grohowski said the "general tone of the letter is supportive of the rule."
However, there are a number of points in the legislation where the ICI is requesting clarification. The ICI made "a number of technical comments," Grohowski said.
Even more importantly, though, is the need for time. Grohowski called the Oct. 25 deadline a "statutory effective date," adding that in other instances, the Treasury and the SEC have given firms a grace period to come into full compliance with the law.
Nine Months More
While originally considering requesting a window of 120 days, Grohowski said that feedback from firms has led him to believe that a minimum of six months is necessary, with nine months being the ideal time period.
"It just takes an enormous amount of time to revamp the system," he said. The alterations will take time to implement because "the greatest impact is going to be in the back-office systems and the ways in which account information is collected." He said that for fund companies to comply with the Patriot Act, they will have to retrain personnel and expand the required information on new customers. Information that isn't currently required will now be mandatory.
Now four pieces of information are required on new accounts, according to the ICI. Included are the person's name, residential address, date of birth and Social Security number or government-issued ID. Before the legislation, the date of birth was only required in some instances, and a Social Security number or ID number was not a prerequisite. Additionally, a mailing address was necessary before, but not a residential address, so new account investors could have used a P.O. box or some other type of mailing address.
However, not everyone in the industry is on the same page as the ICI.
Roy Weitz, publisher of Fund-Alarm.com, a Web site that tracks and profers searing comments on mutual funds, said that he thinks the problem fund companies are having with complying with the law has more to do with the vagueness in the wording of the act, rather than any real-world obstacles to actually complying with the law.
Weitz also thinks that some firms are just not on top of things. "They have staff that could probably do this without a huge amount of additional work," he said of companies having to make adjustments to comply. "They knew this was coming since, I think, April. And they knew since last October, when the law was passed. Generally, a year to implement a plan like this is quite reasonable."
He added that the ICI's intended request for a lengthy grace period seems unnecessary. "Nine months is a long time. I think they're saying indirectly that this is not a high priority for them. My guess is that they're not going to get six to nine months." If anything, Weitz said he thinks regulators will only allow a few months' grace period.
"Last October, this was a serious issue and a high national priority," he said, adding, "The President has told us we're in a war. If this is an important wartime policy, [the government allowing for a long grace period] just sends a really bad message. The financial issues are really important."
Of the ICI's remarks, Weitz said, "I think what they're telling us is indirectly that they are not taking this that seriously."