GT Alert

USA Patriot Act - Proposed Regulations Affecting Hedge Funds, VC Funds, Reits and other Unregistered Investment Companies

September 2002
By Alan B. Horn, Carl A. Fornaris, and Ileana Gomez, Greenberg Traurig

  View or download the PDF version of this Alert here.

On September 18, 2002, the United States Department of the Treasury proposed new USA PATRIOT Act regulations that would require most unregistered investment companies such as hedge funds, venture capital funds, private equity funds, commodity pools and real estate investment trusts (REITs) to establish formal anti-money laundering ("AML") programs. Implementation of these programs will require such companies to devote substantial resources to achieve compliance.

Comments on these important proposed regulations must be received by the Treasury Department no later than 60 days after publication in the Federal Register.

Background

Under the Bank Secrecy Act, as amended by the USA PATRIOT Act, every "financial institution" is required to establish an AML program. The statutory definition of "financial institution" includes an "investment company." However, in an interim rule issued by the Treasury Department earlier this year, investment companies other than mutual funds were exempted from the AML program requirement contained in the PATRIOT Act. The proposed

regulations - when issued in final form - would eliminate the AML program exemption.

Proposed Regulations

Specifically, the proposed regulations would define the term "unregistered investment company," which is a subset of the term "investment company," to include investment vehicles such as hedge funds, private equity funds, venture capital funds, commodity pools and REITs. These companies would be required to establish an AML program that includes, at a minimum:

1. the development of internal policies, procedures, and controls;
2. the designation of a compliance officer;
3. an ongoing employee training program; and
4. an independent audit function to test the program.

Applicability. The Treasury Department recognizes that an overly expansive definition of the term would unnecessarily burden businesses not prone to money laundering. Therefore, the proposed regulations would be applicable to companies that:

1. give an investor the right to redeem any portion of his or her ownership interest within two years after that interest was purchased;
2. as of the most recently completed calendar quarter, have total assets of $1,000,000 or more; and
3. are organized in the United States, sell ownership interests to a U.S. person, or are organized, operated, or sponsored by a U.S. person.

Exceptions. Excluded from the proposed regulations are companies owned by one family, employees’ securities companies and employee benefit plans that are not construed to be "pools" as defined by the Commodity Futures Trading Commission.

The Treasury Department press release and proposed regulations are available on the Treasury Department website at http://www.treasury.gov/press/releases/po3436.htm

© 2002 Greenberg Traurig

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