Anti-Money Laundering Programs for Unregistered Investment Companies

1 31 U.S.C. 5312(a)(2)(I).
2Section 3(a)(1) of the 1940 Act defines ‘‘investment company’’ as any issuer that (A) is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; (B) is engaged or proposes to engage in the business of issuing face-amount certificates of the installment type, or has been engaged in such business and has any such certificate outstanding; or (C) is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 per centum of the value of such issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis. 15 U.S.C. 80a–3(a)(1). 3FinCEN; Anti-Money Laundering Programs for Mutual Funds 67 FR 21117 (Apr. 29, 2002). Under the rule, the anti-money laundering program must include achieving and monitoring compliance with the applicable requirements of the BSA and Treasury’s implementing regulations. 4See 67 FR 21110 (Apr. 29, 2002). 5 67 FR 21117, supra note 3. Treasury also observed that, while mutual funds are the predominant type of registered investment company, other types of investment companies are regulated by the SEC, such as closed-end companies and unit investment trusts. A closed-end company typically sells a fixed number of shares in an underwritten offering. Holders of closed-end company shares than trade their shares in secondary market transactions, usually on a securities exchange or in the over-the-counter market. A unit investment trust is a pooled investment entity without a a board of directors or investment adviser, and offers investors redeemable units in an unmanaged, fixed portfolio of securities. Treasury stated its intention to continue to consider the type of anti-money laundering program that would be appropriate for these companies, including the extent to which they pose a money laundering risk that is not more effectively covered by the anti-money laundering program of another financial institution involved in their distribution. Id. at 21117–21118. That process is continuing. 6 Id. at n.5. Section 356(c) of the USA Patriot Act requires that the Secretary, the Board of Governors of the Federal Reserve System (‘‘Federal Reserve’’) and the SEC jointly submit a report to Congress by October 26, 2002 recommending effective regulations to apply the requirements of the BSA to investment companies as defined in section 3 of the 1940 Act, as well as to persons that would be investment companies but for the exceptions provided in sections 3(c)(1) or 3(c)(7) [15 U.S.C. 80a–3(c)(1), 3(c)(7)]. DEPARTMENT OF THE TREASURY 31 CFR Part 103 RIN 1506–AA26 Financial Crimes Enforcement Network; Anti-Money Laundering Programs for Unregistered Investment Companies AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: FinCEN is
proposing to amend the Bank Secrecy Act (‘‘BSA’’) regulations to prescribe minimum standards applicable to certain unregistered investment companies, such as hedge funds, commodity pools, and similar investment vehicles, pursuant to the revised provision in the BSA that requires financial institutions to establish anti-money laundering programs. DATES: Written comments on all aspects of the proposal are welcome and must be received on or before November 25, 2002. ADDRESSES: Because paper mail in the Washington area may be subject to delay, commenters are encouraged to e￾mail comments. Comments should be sent by one method only. Comments (preferably an original and four copies) may be mailed to: FinCEN, PO Box 39, Vienna, Virginia 22183–1618, Attention:
NPRM—Section 352 Unregistered Investment Company Regulations. Comments also may be submitted by electronic mail to the following Internet address: regcomments@fincen.treas.gov, again with a caption, in the body of the text, ‘‘Attention: NPRM—Section 352 Unregistered Investment Company Regulations.’’ Comments may be inspected, between 10 a.m. and 4 p.m., in the FinCEN reading room in Washington, DC. Persons wishing to inspect the comments submitted must request an appointment by telephoning (202) 354–6400 (not a toll-free number). FOR FURTHER INFORMATION CONTACT:
Office of the Assistant General Counsel for Banking & Finance (Treasury), (202) 622–0480; Office of the Assistant General Counsel for Enforcement (Treasury), (202) 622–1927; or Office of Chief Counsel (FinCEN), (703) 905–3590 (not toll-free numbers). SUPPLEMENTARY INFORMATION:
I. Background
On October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107–56) (‘‘USA Patriot Act’’ or ‘‘Act’’). Title III of the Act makes a number of amendments to the anti￾money laundering provisions of the BSA, which are codified in subchapter II of chapter 53 of title 31, United States Code. These amendments are intended to promote the prevention, detection, and prosecution of international money laundering and the financing of terrorism. Section 352(a) of the Act, which became effective on April 24, 2002, amended section 5318(h) of the BSA. As amended, section 5318(h)(1) requires every ‘‘financial institution’’ to establish an anti-money laundering program that includes, at a minimum (i) the development of internal policies, procedures, and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test the program. Section 5318(h)(2) authorizes the Secretary, after consulting with the appropriate Federal functional regulator, to prescribe minimum standards for anti-money laundering programs, and to exempt from the application of those standards any financial institution that is not otherwise subject to BSA regulation. Under the BSA, the definition of ‘‘financial institution’’ includes an ‘‘investment company,’’1 a term that is not defined by the BSA or any rule yet adopted by FinCEN. The Investment Company Act of 1940 (codified at 15 U.S.C. 80a) (‘‘1940 Act’’) defines the term, and subjects registered investment companies to a comprehensive scheme of regulation administered by the Securities and Exchange Commission (‘‘SEC’’).2 In April 2002, FinCEN issued an interim final rule requiring investment companies that are ‘‘mutual funds’’ (i.e., registered open-end management investment companies as described in the 1940 Act) to develop and implement anti-money laundering programs reasonably designed to prevent them from being used to launder money or finance terrorist activities.3 By separate interim rule, Treasury temporarily exempted investment companies other than mutual funds from the requirement of
section 5318(h)(1) of the BSA that they
establish anti-money laundering programs.4 In the interim rule on anti-money laundering programs for mutual funds, Treasury observed that there are a number of entities excluded from the 1940 Act definition of ‘‘investment company,’’ 5 and that those entities in the future would likely be required to establish anti-money laundering programs under section 352 of the Act.6 Today, FinCEN is proposing a new rule that would define an investment company to include certain investment vehicles not subject to regulation under the 1940 Act, and require these entities to establish anti-money laundering programs in accordance with guidelines included in the rule. These guidelines are substantially the same as those FinCEN has established for mutual funds.
II. Unregistered Investment
Companies—General Issues
While Treasury believes it is incumbent upon all United States businesses to be on guard against their use by terrorists or other criminals for money laundering, the BSA imposes