The Financial Crimes Enforcement Network is issuing this guidance to clarify the due diligence obligations of mutual funds under the regulations implementing section 312 of the USA PATRIOT Act (“section 312”).1 Specifically, this guidance addresses the issue of for whom a mutual fund establishes, maintains, administers, or manages an account when its shares are purchased or redeemed by a U.S. financial institution through the Fund/SERV system of the National Securities Clearing Corporation (“NSCC”) on behalf of a foreign financial institution.
It is our understanding that NSCC’s Fund/SERV system streamlines the clearance and settlement of mutual fund transactions by enabling NSCC members to transact business with hundreds of mutual fund families and thousands of mutual funds through a single, standardized process. Transactions in mutual fund securities cleared and settled through Fund/SERV are recorded by a mutual fund’s transfer agent on the NSCC member’s account, although the member in certain circumstances also may rely upon the fund’s transfer agent to perform discrete recordkeeping tasks pursuant to a networking agreement. In order for a foreign financial institution to effect mutual fund purchases and redemptions through Fund/SERV it must either establish an account with an NSCC member, or become directly a member of NSCC.2
Based on the facts and circumstances presented, we believe that when an NSCC member is a U.S. financial institution subject to the provisions of section 312 a mutual fund establishes, maintains, administers, or manages an account for the NSCC member, rather than for the NSCC member’s customer.3 In the event that a foreign financial institution becomes an NSCC member, the mutual fund would be required to treat that foreign financial institution as a correspondent account subject to the appropriate level of due diligence and monitoring.