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The Patriot Act And Mutual Funds

As of October 1, those opening a mutual fund account -f or the very first time - will need proper identification thanks to the USA Patriot Act.

One of the national security precautions stemming from the 9/11 attacks was the creation of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act; better known by its acronym--- the USA Patriot Act.

Within the money world, the Patriot Act is intended to prevent money transfers and laundering activities that fund terrorism. One of the ways the government plans on doing that is by setting up customer identification programs, (CIPs). These programs were to be in place by October 1 at institutions like banks, broker dealers, credit unions, savings associations, trust companies and mutual funds.

"Fundamentally, the customer identification program is very similar to what banks have been required to do under the Bank Secrecy Act for some time now, which is to get positive identification from new shareholders in mutual funds, " says Matthew Dallett, a securities lawyer and partner at Palmer & Dodge LLC in Boston.

What the Act asks of mutual funds is to verify the identity of the person opening the account; maintain records of the information used to verify that identify; and to consult government known or suspected terrorists lists to determine whether the customer appears on any list.

The questions that are a part of the CIP that now are being asked of new mutual fund investors aren't unusual. In fact, many have been asked on fund new application forms for years.

On State Street Research Funds' new account application form, for instance, the first few spaces that need filling in ask for your name, residential address, date of birth and tax identification number. Those four questions are all that's required in the CIP.

What's different is you'll probably need to show other forms of identification, like a driver's license, to prove you are who you say you are. Then, the info has to be back office verified within "a reasonable amount of time".

If it can't be verified, the account you've opened could be closed and fund shares redeemed.

Who's doing the verification checking will depend upon the arrangements the fund families have made and may be done in-house or through intermediaries. "If customers buy their fund shares through Schwab or other fund supermarkets, the fund will rely on the intermediary to do the ID check," says Dallett.

Once a new account is opened and verified, it's business as usual for the fund shareholder. And, if he or she decides to exchange funds---within that same fund family---there won't be any need to reverify their ID. But, open a personal account at a new fund family and that identification process begins all over again.

If you're wondering whether money laundering has been a problem within the fund industry, Dallett says if it has that he hasn't heard of it. " One of the loudest complaints voiced about this was that nobody thought that mutual funds had ever been shown to have a money laundering problem," he says.

As always, this additional work will cost money. Cost that will likely trickle down to fund shareholders. Sheldon Jacobs, editor of the No-Load Fund Investor newsletter estimates the cost of opening a new mutual fund account could triple going from $7 to $22. So keep an eye on your fund's annual expenses---they could edge upwards.

Another Oct.1 deadline involves the Securities and Exchange Commission (SEC). They had until that date to issue a progress report to the House Financial Services Committee about what it's been doing to address problems within the mutual fund industry.

Some of the things the SEC would like to put in place are rules the give investors more information about what a fund is investing in, more disclosure about fees, commissions and the other costs that funds incur. The SEC would also like to see clarity in fund advertisements---emphasizing that a fund's past performance record does not assure future success.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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