Industry lawyers are saying that a much larger segment of the mutual fund industry could fall under a law which requires financial institutions to develop new privacy guidelines by Nov. 1. Firms began to develop privacy guidelines only after the Investment Company Institute alerted its members several weeks ago that the Fair and Accurate Credit Transactions Act (FACTA)--passed last November--might apply to them.
At the time, lawyers were unsure about what types of funds would be covered by the rule--some thought that only money market funds might be affected, while others thought that other funds with checking features might be affected. Since the ICI alert lawyers have read up on FACTA and now most seem to agree that any account defined as a "transaction account," which allows the holder to write more than six checks a month or make six exchanges a month into another account, would be included. Lawyers believe that by this standard most mutual funds would be included in FACTA, since many funds allow their holders to make wire or automated clearing house transfers to their bank.
The Federal Trade Commission has not publicly said whether funds will be affected by the law, in which regulators including the Federal Reserve, Federal Deposit Insurance Corporation and the FTC have listed 26 red flags for identity theft and will require a wide range of organizations to create programs to detect, stop and respond to violations.
"When the rules came out there was an assumption that mutual funds were not covered," said Judith Rosenberg, chief compliance officer with Forward Funds. It came as a surprise to learn through the ICI's notice that the rules would apply to Forward because it allowed checks to be sent through a transfer agent. "That meant a shorter window to comply with the regulation" than organizations that had been aware the rules would apply to them when they were introduced, she said. Rosenberg added that she was confident of having preparations in place in time.
Janice Innis-Thompson, senior v.p. and chief compliance officer at TIAA-CREF, said her firm had completed preparations and was comfortable that the regulations would apply to any fund if a client can redeem or withdraw a payment by check or wire transfer. She added that while the ICI member notice provided some clarity, some firms were still grappling with what accounts were covered by the rule.
Geoff Bobroff, president of Bobroff Consulting, said that mutual fund firms are rushing to finalize privacy policies to meet the Nov. 1 deadline and that right now, no one is sure what costs will be. "Whether we like it or not, the industry now realizes that this is applicable," said Bobroff.
A call to a spokesman for the FTC was not returned, but lawyers following the matter say they expect the FTC will soon state that funds are institutions covered under FACTA.
Calls to an Investment Company Institute spokesman were not returned. --Stan Wilson & Yoyce Jones