USA Patriot Act - Proposed Regulations Affecting Hedge Funds, VC Funds,
Reits and other Unregistered Investment Companies
By Alan B. Horn, Carl A. Fornaris,
and Ileana Gomez, Greenberg Traurig
View or download the PDF version of this Alert
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
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
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:
- the development of internal policies, procedures, and controls;
- the designation of a compliance officer;
- an ongoing employee training program; and
- 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:
- give an investor the right to redeem any portion of his or her ownership
interest within two years after that interest was purchased;
- as of the most recently completed calendar quarter, have total assets
of $1,000,000 or more; and
- 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
The Treasury Department press release and proposed regulations are available
on the Treasury Department website at
© 2002 Greenberg Traurig
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