FinCEN Issues Final Rule Requiring Mutual Funds to Report Suspicious Activity and Offers Guidance on Mutual Fund Due Dilligence Obligati

Final Rule on Mutual Fund Suspicious Activity Reporting - view adopting release

Today, the Financial Crimes Enforcement Network ("FinCEN") issued a final rule that will require mutual funds to file suspicious activity reports on Form SAR-SF. The final rule amends the regulations implementing the Bank Secrecy Act and constitutes a further step toward creating a comprehensive system for the reporting of suspicious transactions by domestic financial institutions, as part of the overall anti-money laundering program of the Treasury Department. The requirements of the rule will apply to transactions occurring on or after November 1, 2006.

The final rule will require mutual funds to report the following types of transactions conducted or attempted by, at, or through a mutual fund that involve or aggregate to at least $5,000 in funds or other assets and the mutual fund knows, suspects or has reason to suspect that the transaction or pattern of transactions:

• involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade federal laws or regulations;
• is designed, whether through structuring or other means, to evade the requirements of the Bank Secrecy Act;
• has no business or apparent lawful purpose, is an unusual transaction for the particular customer and the mutual fund knows of no reasonable explanation for the transaction; or
• involves the use of the mutual fund to facilitate criminal activity.

Although a mutual fund may contract with an affiliated or unaffiliated service provider to perform the reporting obligation as the fund’s agent, the mutual fund remains responsible for assuring compliance with the rule and, therefore, must maintain an active working relationship with the service provider’s compliance personnel to oversee the performance of its reporting obligations.

FinCEN Guidance on Mutual Fund Due Diligence Obligations for Foreign Accounts - view guidance

Separately, FinCEN provided guidance on the due diligence obligations of mutual funds under regulations implementing section 312 of the USA PATRIOT Act (“section 312”). Specifically, FinCEN was asked to determine for whom an account is established, maintained, administered, or managed when mutual fund shares are purchased or redeemed by a U.S. financial institution on behalf of a foreign financial institution through the Fund/SERV system of the National Securities Clearing Corporation (“NSCC”). FinCEN indicated that when a U.S. financial institution is the NSCC member, the mutual fund establishes, maintains, administers, or manages an account for the NSCC member, rather than for the foreign financial institution. However, if the foreign financial institution is the NSCC member, the mutual fund is required to treat that foreign financial institution as a correspondent account subject to the appropriate level of due diligence and monitoring.

Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any member of Morgan Lewis’s Broker-Dealer Practice, including:

Washington, D.C.
Beth D. Kiesewetter
202.739.5127
bkiesewetter@morganlewis.com