Like many of the regulations spawned by the U.S. Patriot Act of 2001, the new provisions relating to mutual funds are somewhat obvious, a bit redundant and rather unlikely to have much of an impact on individuals.
As of Oct. 1, mutual fund companies are now required to collect specific information from new investors and perform routine identity checks. But lest you have alarming visions of Attorney General John Ashcroft personally grilling you about your asset-allocation plan, rest assured that the information is so general it's shocking that funds haven't been collecting it all along.
Funds are now required to collect the name, date of birth, residential address (no post office boxes) and social security number (or that of another government-issued ID) for each person with access to the new account. "This is definitely going to improve the collection of information on individuals, and that's great," says Kathryn Barland, a senior research analyst at Lipper, a
Barland, who previously worked in the enforcement division of the
Securities and Exchange Commission
, says that this is primarily a coup for regulators who will now have a better place to start when investigating account owners. "It's adding transparency for the regulators," she says. "There was definitely a problem with that before. It's surprising rules like this weren't already in place."
The U.S. Patriot Act, passed as a result of Sept. 11 in October 2001 by a shell-shocked Congress eager to tackle, well,
, also included a provision that requires funds to review customer accounts with balances of $5,000 or more for suspicious trades. All these regulations are aimed at preventing money laundering and at tracking the financial movements of suspected terrorists, although there's precious little in the U.S. Patriot Act that wasn't already covered in the Bank Secrecy Act of 1996.
If an account application is filed without the appropriate information, the fund will simply call and ask for the missing information. Once the new account has been opened, funds are required to verify the information, usually through a documentary review process, according to Debbie Seidel, a
T. Rowe Price
vice president in charge of compliance. These reviews are generally done the way any background check is performed -- checking with the credit bureaus, ensuring information found from a variety of sources matches, etc. Anything out of the ordinary will prompt a phone call to the account holder.
Now, additional regulations often lead to additional bellyaching by the fund industry as to what it's going to cost. But TowerGroup, a research and advisory firm that focuses on the financial services industry, estimates that first-year implementation costs will run some $288 million, with recurring annual costs of $140 million. That amount represents less than two-tenths of 1% of total mutual fund fees, or about $13 per new account, according to Towers. So while many investors justifiably fear that any increase in administrative costs will translate immediately to higher fees, look askance at any fund that uses this as a reason to seriously hike fees.
Existing account holders won't find themselves troubled by any phone calls regarding such matters, though -- these new rules apply only to new customers. Existing clients that choose to open new accounts in new funds won't be subject to the new policy.
The regulations hardly seem onerous; indeed, many fund companies already had such requirements. Aside from a niggling phone call or two to investors who fail to fill out the account forms properly, individuals will remain largely unaffected by the new rules. Trusts, corporations, nonprofits and the like will see an increase in due diligence, Seidel says -- as well as foreign individuals. Investors living overseas without a social security number or resident alien card will be tough customers when it comes to the documentary review process the funds must now do. Companies that have relatively few of such accounts will likely refuse to accept any new ones.
That's a small price to pay for greater transparency, though, Barland says. "It's primarily just a few more lines on an application," she says. "And the benefits far outweigh the costs."