The Financial Crimes Enforcement Network (“FinCEN”) issued a final rule (the “Final Rule”) that will amend the definition of “financial institution” in FinCEN’s regulations, which is less inclusive than the definition in the Bank Secrecy Act itself, to include mutual funds. A “mutual fund” will be defined for this purpose as “an ‘investment company’ (as the term is defined in Section 3 of the Investment Company Act (15 U.S.C. 80a-3)) that is an ‘open-end company’ (as that term is defined in Section 5 of the Investment Company Act (15 U.S.C. 80a-5)) registered or required to register with the Securities and Exchange Commission under section 8 of the Investment Company Act (15 U.S.C. 80a-8).” This definition matches the definition of mutual fund previously included in the Customer Identification Program (“CIP”) and Suspicious Activity Report (“SAR”) rules for mutual funds, but the addition of mutual funds to the regulatory definition of “financial institution” affects the applicability of certain other anti-money laundering (“AML”) requirements to mutual funds.
One consequence of expanding the definition of “financial institution” in FinCEN’s regulations to include mutual funds is that mutual funds, like banks and broker-dealers, will be required to report large currency transactions on currency transaction reports (“CTRs”) rather than Form 8300. The requirements for CTRs, which apply to financial institutions, are more limited in certain ways than the requirements for Form 8300, which apply to businesses more generally. For example, “currency” for purposes of the CTR requirement includes only cash, while Form 8300 applies to transactions involving certain cash-like instruments, such as travelers’ checks and money orders. In addition, the CTR rule requires consideration of reporting of multiple transactions resulting in cash in or cash out totaling more than $10,000 in a single business day, but a Form 8300 filing obligation can be triggered by transactions that occur over a longer period of time.
Another result of the rule amendment is that mutual funds will become subject to the so-called “Recordkeeping and Travel Rule,” which will require mutual funds to create and retain records and include certain information (such as the name and address of the transmitter, date and amount of the transmittal order, and identity of the recipient’s financial institution) in the transmittal order for wire transfers and other transmittals of funds in amounts of $3,000 or more, subject to certain exceptions. In addition, mutual funds will be subject to recordkeeping obligations for extensions of credit and cross-border transfers of currency, monetary instruments, checks, investment securities and credit, if such transactions involve more than $10,000.
The rule amendment also makes two clarifying changes to the AML regulations for mutual funds. First, the definition of “mutual fund” in the AML Program rule for mutual funds has been revised to add an explicit reference to open-end companies “registered or required to registered under section 8 of the Investment Company Act,” thereby conforming the definition with the definition of mutual fund in the CIP and SAR rules. In addition, FinCEN’s regulations have been amended to clarify that the IRS does not have authority to examine mutual funds for BSA compliance. Previously, the regulations assigned such examination responsibility had been assigned to the SEC, but did not expressly limit the IRS’s authority.
The rule amendments will take effect on May 14, 2010, and mutual funds will become subject to the CTR reporting requirements on that date. However, mutual funds will not be required to comply with Recordkeeping and Travel Rule requirements until January 10, 2011.