THE HEIGHTENED security that has become a way of life for Americans since September is about to come to the mutual fund industry.
As part of the USA Patriot Act signed last fall by President Bush, mutual funds - and a host of other financial-services companies - must file "suspicious activity reports" with government investigators whenever the conduct of a client or potential customer has the slightest sniff of money-laundering. This may make funds reluctant to accept certain types of shareholder transactions.
Further, under rules requiring companies to "know your customers," funds must collect more data on new shareholders and may even ask for additional information on existing accounts.
The Treasury Department included the fund industry in its anti-money-laundering efforts announced April 24, giving companies 90 days to comply. That means the new changes will be effective by mid-July, a transition made more difficult because specific regulations and requirements are still being formed.
"The main concern for some investors is that privacy issues will be crashing up against anti-money-laundering rules," says Delia Stafford, associate director for business development regulatory services for BISYS, a Florida firm that helps fund firms handle customer transactions.
"Investors aren't used to being asked where their money is coming from, but they may get that question now."
Anti-money-laundering measures have been in place in banking for years.
The best known of these activities is the federal law requiring banks to report cash deposits of $10,000 or more, a move made partly because drug dealing and other criminal activities generate large amounts of cash.
But suspicious activities for banks and funds can include smaller transactions, particularly wire transfers that occur in rapid succession and that look on the surface like an attempt to beat the $10,000 limit.
Some market-timing moves, therefore, could raise the specter of suspicious activity.
Bob Grohowski, associate counsel for the Investment Company Institute, the trade association for the fund industry, says that for most investors the intrusions resulting from the Patriot Act should be minimal.
"Account application forms may be longer, and you may not like having to give out more information, but that's about all most people will see from this," says Grohowski. "Some companies have let people open accounts with just a name and address. Now it's going to be a name, residential address, date of birth and maybe a Social Security number."
Funds will continue to send statements to post office boxes and mailing addresses, Grohowski says, "but no residential address and no Social Security number will mean no new account."
Fund customers might also be required to provide driver's license numbers, signed copies of certain tax documents, explanations of where the money for a large deposit came from and statements swearing that all of the other information is true and accurate.
The gathered information is supposed to be checked against a list of suspected terrorists compiled by the Treasury Department. Fund companies will be prohibited from telling customers when account information or investment actions warrant the filing of a suspicious activity report.
Personal data aside, the Patriot Act could lead many companies to stop taking third-party checks, international wire transfers and cashier's checks.
Electronic money transfers from abroad and large third-party transactions - in which you get a check made out in your name and sign it over to a fund for deposit into your account - meet the banking standard for suspicious activity, and many fund companies refuse them. With cashier's checks, the fund has no way of knowing where the money behind the check came from, a problem under the "know your customer" rules.
"Companies might reasonably decide it's better not to take money than to process it, at least when the money is delivered in certain ways," Grohowski says.
Rules about fast turnarounds also might be tightened. Many funds already won't redeem new deposits for seven days. More companies might adopt that time period or lengthen it, which could hinder some market-timers.
In the end, most observers expect the public to handle the changes without significant hue and cry.
Terence P. Smith, managing director of InCap, a Pennsylvania-based fund-servicing firm, says, "It'll be just like the airports. A lot of people don't care if you strip them naked, and other people get miffed if you ask them a single question. But the government says that these rules are necessary for our safety, whether it's in the airport or in a mutual fund, so it's just another sign of the times."
Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, MA 02107-2378.