October 1 brought more than the Autumn chill to Wall Street. It was also the deadline for Section 326 of the USA Patriot Act, requiring financial institutions to implement customer-identity-verification procedures for all new accounts. In the newest section of the Patriot Act, the Department of Treasury is requiring mutual funds, securities brokers and dealers, banks and trust companies, and other financial institutions to develop a Customer Identification Program. The CIP must include reasonable procedures for collecting and identifying information about customers opening accounts, verification of those customers, maintaining verification information, and checking customer information against suspected-terrorist lists.
"These are new requirements for us. We are talking about a process that didn't ever exist in its current form," says Russell Curtis, vice president of operations at Eaton Vance Management, a Boston-based mutual fund company with $70 billion in assets. "But it's a requirement and not an optional issue, so it's something we all need to do."
Curtis explains that when Eaton Vance understood what would be required of it, the fund company turned to its transfer agent, Wilmington, Del.-based PFPC, to help it comply with Section 326.
PFPC's solution is a "combination of a people process and a systems process," Curtis says. Transactions arriving at the transfer agent are first checked for all four necessary data elements: name, tax ID number, address and date of birth. If any information is missing, or doesn't match one of PFPC's informational databases, someone from the transfer agent will determine the discrepancy and hunt down missing elements, or correct erroneous information.
In addition, Curtis says that Eaton Vance, like many fund companies, has updated its applications to ensure that the correct information is being collected. For example, a P.O. Box is no longer valid as an address, joint accounts require information from all participants, and tax ID numbers need to match corresponding names.
"On the surface it seems as though we already had this information, and to some extent we did," Curtis says, explaining that other channels, such as the IRS, would later verify information such as tax ID numbers some time after accounts were opened. However, he says, this pre-screening of applications will increase accuracy of information with "more eyes looking at a transaction."
Keeping in compliance with Section 326 may not have been easy on the pocketbook for many mutual funds. Curtis notes that Eaton Vance undertook an application-form redesign and PFPC forged new relationships with service providers to gain access to data lists, as well as staffed a team to handle CIP-process exceptions.
"Eaton Vance and PFPC have added significantly to the infrastructure that exists to support the Eaton Vance mutual-fund operations," Curtis explains, but says the price tag is warranted in today's regulatory environment. "I certainly don't want Eaton Vance to be a fund named as one that isn't in compliance."
Whether the cost is justified or just a necessary evil, Curtis says that Section 326 is a sign of the times. "Consider that several years ago, customer privacy was all the rage. Now there's a definite concern among legislators and regulators that the identities of individuals in the financial markets are known and established," he says. "We (fund companies) all like to think that we have not been a vehicle for shady activity, and I think our experiences would hold that true, but we're talking about different times now."
How was Eaton Vance's first day of being under the microscope for CIP? "Every application that came in today was on a new application and all of the information was provided for us," Curtis answers. "So one day into it, so far, so good."
This article originally appeared in Wall Street & Technology Online, Oct. 2, 2003.URL: http://wstonline.com/story/topNews/WST20031002S0009