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Identity theft is a serious problem. Title X of the
Dodd-Frank Wall Street Reform and Consumer Protection Act increased the scope
of firms that would be subject to federal regulatory requirements on identity
theft rules. The Securities Exchange Commission and the Commodities Futures
Trading Commission just published a proposed rule addressing that new scope.
Section 10889(a)(8), (10) of Dodd-Frank amended the Fair
Credit Reporting Act by adding the CFTC and SEC to the list of federal agencies
required to create and enforce identity red flag theft rules. The new rule
proposal would require SEC-regulated entities to adopt a written identity theft
program that would include reasonable policies and procedures to:
The proposed rule would include guidelines and examples
of red flags to help firms administer their programs.
As newly registered investment adviser, this looked like
a daunting prospect. The rule does list specific entities in its definition of
"financial institution." That means investment advisers and private fund
managers are not excluded.
However, the requirements are further limited to a
"transaction account: a deposit or account on which the depositor or account
holder is permitted to make withdrawals by negotiable or transferable
instrument, payment orders of withdrawal, telephone transfers, or other similar
items for the purpose of making payments or transfers to third parties or
others." 12 U.S.C. 461(b)(1)(C).
Smartly, the SEC recognizes that most registered
investment advisers (and private fund managers) are unlikely to hold
transaction accounts and would not qualify as a "financial institution". One of
the questions soliciting comments in the proposed rule is whether the rule
should "omit investment advisers or any other SEC-registered entity from the
list of entities covered by the proposed rule?"
I think it makes sense to look at the account itself and
not just the institution. Particularly in the case of private fund managers,
there is usual limited windows when cash can come out of the accounts and be
returned to investors.
Even if the limited partner interests are not a
transaction account. It may make sense to look at the final rule as a model for
some internal policies and procedures.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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