FinCEN Publishes Interpretive Guidance on Mutual Fund

On May 4, 2006, the Financial Crimes Enforcement Network (FinCEN) published the final rule creating a suspicious activity reporting requirement (SAR) for openend investment companies registered with the Securities Exchange Commission under the Investment Company Act of 1940 (mutual funds) in the Federal Register. Since that date, the industry has anticipated the publication of interpretive guidance from FinCEN on how to apply the final rule to mutual fund transactions.

Yesterday, less than one month before the rule’s effective date, FinCEN published the anticipated guidance in the form of “Frequently Asked Questions,” which includes not only practical guidance on the application of the rule but also specific requirements to establish an internal control framework before a mutual fund may share information about suspicious activity reporting with “control” affiliates, such as its investment adviser.

With respect to practical guidance, FinCEN’s Frequently Asked Questions reviews, among other things, (1) the criteria to determine whether an SARSF (FinCEN Form 101) must be filed, (2) the “knows, suspects, or has reason to suspect” standard, (3) “red flags” indicative of a need to file an SARSF, (4) the mutual fund’s ability to outsource SAR reporting to an affiliated or unaffiliated service provider, (5) the filing of a single SARSF by multiple mutual funds involved in a suspicious transaction, (6) the filing of a “joint filing” SARSF by a mutual fund and another financial intermediary (e.g., a retailing brokerdealer) in which both are involved in a suspicious transaction, (7) the timeline and manner in which an SARSF must be filed, (8) the records relating to an SARSF that must be maintained, (9) the limitations on liability for SARSF filings, and (10) the regulator responsible for examinations and enforcement. Much of this interpretive guidance is strikingly similar to that provided for other financial institutions with SAR reporting obligations.

However, FinCEN’s interpretive guidance relating to information sharing with “control” affiliates may be somewhat unexpected. FinCEN requires mutual funds to establish what amounts to an internal controls framework before sharing information with control affiliates, such as its investment adviser (typically the only entity with sufficient personnel to effect a mutual fund’s SARSF reporting obligations) and any parent entities in the chain of control. Specifically, a mutual fund must ensure that it has written confidentiality agreements or arrangements in place with its control affiliates specifying that they will protect the confidentiality of the SARSF reports through appropriate internal controls. Funds and advisers should evaluate their existing written confidentiality agreements, arrangements, and procedures to determine whether any action is necessary in light of FinCEN’s interpretative guidance.

Click here for FinCEN's News Release
Click here for FinCEN's Frequently Asked Questions
Click here for Mutual Fund Suspicious Activity Reporting Final Rule

Investment Management FYI is a service of the Investment Management Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any of the following Morgan Lewis attorneys:

Anne C. Flannery
Morgan, Lewis & Bockius LLP
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New York, N.Y. 10178
Telephone: 212.309.6370
Fax: 212.309.6001
[email protected]

Christian J. Mixter
Morgan, Lewis & Bockius LLP
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Washington, D.C. 20004
Telephone: 202.739.5575
Fax: 202.739.3001
[email protected]

Beth D. Kiesewetter
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave, NW
Washington, D.C. 20004
Telephone: 202.739.5127
Fax: 202.739.3001
[email protected]

Morgan, Lewis & Bockius LLP