On August 28, 2024, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a final rule that will, upon effectiveness (January 1, 2026), require most private fund managers to:

• adopt and operate a risk-based program requiring anti-money laundering and countering financing of terrorism (“AML/CFT”) measures; and
• report suspicious activity to FinCEN.

FinCEN’s Fact Sheet describing the key elements of the final rule can be found here.

Definitional Amendment. This change was accomplished by amending the definition of a covered “financial institution” in FinCEN’s AML regulations to append “investment adviser” as a new, eleventh, category. (Currently, the definition of “Financial Institution” includes, among other entities, banks, money services businesses, and securities broker/dealers.)

Covered Advisers. This addition of “investment advisers” to the “financial institution” definition is broad. It includes both registered investment advisers (“RIAs”) and unregistered advisers that file as exempt reporting advisers (“ERAs”). In other words, the following are included in the amended definition:

• All RIAs, other than:

(i) advisers reporting zero assets under management on their Form ADV,

(ii) advisers registered as “mid-sized advisory firms” (i.e., an adviser with regulatory assets under management between $25 and $100 million that are not subject to a state’s registration and examination regime),

(iii) advisers solely registered as pension consultants, and

(iv) advisers solely registered as “multi-state advisers.”

• All ERAs (including non-US managers, private fund managers, and venture capital advisers exempt under Investment Advisers Act section 203(l) or (m)).

Note that most “foreign private advisers” (i.e., advisers without a US place of business with less than $25 million in AUM attributable to U.S. investors and fewer than 15 US-person clients or investors) and commodity pool operators that are not RIAs or ERAs are not “financial institutions” under the expanded definition of this regulation (although federal anti-money laundering and similar laws apply), of course.

Obligations. At a high level, the amended regulation will require RIAs and ERAs to:

• implement a risk-based and reasonably designed anti-money laundering/combatting the financing of terrorism (an “AML/CFT”) program, including due diligence and other KYC measures;
• file Suspicious Activity Reports (“SARs”) and certain other reports with FinCEN;
• comply with recordkeeping obligations, e.g., retaining records relating to the transmittal of funds; and
• fulfill certain other obligations applicable to financial institutions subject to the Bank Secrecy Act and FinCEN’s implementing regulations, such as special information sharing procedures.

Other AML/CFT measures are addressed in the regulations, such as training, review and testing obligations.

Oversight. FinCEN is delegating its examination authority relating to investment advisers under this rule to the SEC.

Compliance Date. The compliance date has been set at January 1, 2026.

Compliance with these measures will be a heavy lift for many advisers, including advisers that outsource many of these AML and KYC functions for their funds to professional administrators. Numerous questions, including how to address corporate structures that include covered “investment advisers” and other fund sponsor entities, will undoubtedly arise. As a result, covered advisers should begin planning for the effective date as soon as possible.