SEC Proposes New Patriot Act Rules: Hedge Funds Next?

by Carla Johnson, Investors Offshore, London

04 July 2002

Under the 'Patriot Act' passed by Congress in February this year after the 9-11 atrocities, the Securities and Exchange Commission was required to instal new rules to combat terrorist financing and money laundering through US brokerage and mutual-fund accounts, to be effective by Oct. 25, 2002.

Under the SEC's just-published proposal, US brokerages and mutual-fund companies must verify the identify of anyone opening an account and check the name against a list of known and suspected terrorists and terrorist organizations. Brokerage and mutual-fund firms would be required to maintain records on customer identity for at least five years after an account is closed.

Proposed identity checks would require individuals opening a new account to provide proof of their name, date of birth and address, which financial firms must verify through documents or an electronic database. Brokers may divide responsibility for identity checks with clearing firms or intermediaries, but the SEC said if they have another firm handle the task, they must be sure they can rely on it to do a thorough job.

Identity verification is required only for accounts opened on or after Oct. 25 2002, as the rule excludes existing accounts.

At this point, hedge funds aren't covered by the rule, but the Patriot Act required the SEC to study them and to issue a report this fall on whether anti-terror rules should include hedge-fund investments.

There will be a 45-day consultation period for the new rules; but this period won't start until the Treasury Department takes up the matter, as Congress required the rule to be jointly proposed by both agencies. Under the legislation it will be the Treasury Department that enforces the new rules.

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