ICI Responds to IOSCO Report on Funds' Anti-Money Laundering Responsibilities, May 2005

Washington, DC, May 23, 2005 - The Institute strongly supports effective rules to combat potential money laundering activity in the financial services industry and supports many of the concepts in an International Organization of Securities Commissions (IOSCO) report. However, in a recent comment letter, ICI also expresses concern that the report: overstates the responsibility of collective investment schemes (CIS), such as mutual funds, to verify the identity of beneficial owners of accounts held by intermediaries; suggests that CIS should be treated like securities firms with respect to the types of information they are expected to collect from investors; and is overly prescriptive in the section dealing with the performance of anti-money laundering responsibilities by other financial institutions or service providers.

Background
IOSCO has adopted the principle that regulators should require securities market intermediaries to have in place policies and procedures designed to minimize the risk of the use of an intermediary's business as a vehicle for money laundering. IOSCO has endorsed principles to address the application of the client due diligence process in the securities industry, and IOSCO's Financial Action Task Force on Money Laundering (FATF) has issued 40 Recommendations on combating money laundering and the financing of terrorism.

ICI Position
The Institute supports the three broad best practice standards outlined in IOSCO's report but expresses concerns over several statements made in the report. In its comment letter, ICI points out that the interests of fund operators and fund shareholders to eliminate market timing generally are aligned, and expresses concerns about statements in the report concerning the obligations of fund operators with respect to net asset value (NAV) accuracy, dilution, and agreements with distributors, and the extent to which external auditors can be expected to review fund compliance with anti-market timing obligations. Specifically, ICI states that:

fair value pricing represents a good faith estimate of a security's value and there is no "right" or "accurate" price for a fair-valued security;
funds may not be able to impose legally enforceable duties on all intermediaries to comply with fund market timing policies and, even when funds can amend existing contracts with distributors, they cannot guarantee that all market timing transactions will be identified by distributors;
funds should be expected to use a reasonable process to analyze the potential for market timing in a fund, devise an appropriate response that is implemented conscientiously, and periodically review these determinations.

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