On August 28, 2024, the Financial Crimes Enforcement Network (FinCEN) adopted a final rule that subjects investment advisers to the anti-money laundering (AML) compliance provisions of the Bank Secrecy Act (BSA). For additional information on that rule as proposed, please refer to “Regulators Seek to Saddle Industry With New Obligations: Firms Bridle and Stir Up Opposition,” Expect Focus – Life, Annuity, and Retirement Solutions (May 2024).
According to FinCEN, the new rule is designed to address illicit finance risks in the investment adviser sector, as revealed in a recent Treasury Department risk assessment that highlighted cases in which sanctioned persons, corrupt officials, and other criminals exploited the investment adviser industry to access and launder funds through the U.S. financial system. It also seeks to bring the United States into compliance with international AML standards by addressing a longstanding gap identified by the global Financial Action Task Force (FATF).
As adopted, the new rule broadens the definition of “financial institution” covered by the BSA to include investment advisers that are registered with the SEC (RIAs) or that report information to the SEC as exempt reporting advisers (ERAs). The expansive new rule requires both RIAs and ERAs to:
- Implement a risk-based and reasonably designed AML program;
- File reports of suspicious transactions, known as suspicious activity reports (SARs), with FinCEN;
- Keep requisite records relating to the transmittal of funds; and
- Comply with special information-sharing procedures between and among FinCEN, law enforcement agencies, and financial institutions under the USA Patriot Act.
As expected, FinCEN delegated examination authority for ensuring compliance with the new rule to the SEC, as the federal functional regulator responsible for the oversight and regulation of investment advisers, in similar fashion to the SEC’s examination of brokers and dealers in securities and mutual funds, which have been required to comply with AML provisions of the BSA for decades.
Notably, however, the new rule does not require investment advisers to adopt a customer identification program (CIP) or take steps to identify beneficial owners of customer entities, which are integral components of AML programs required for other financial institutions subject to the BSA. However, the extension of CIP requirements to investment advisers is part of another recent companion rule proposed jointly by FinCEN and the SEC. If adopted, this proposed rule would require both RIAs and ERAs to:
- Establish written CIPs appropriate for the RIA’s size and lines of business, including risk-based procedures sufficient to verify and form a reasonable belief as to the identity of each customer; and
- Maintain records of information used to verify a customer’s identity.
Federal agencies such as the Treasury and the SEC are likely to see broad changes in regulatory initiatives once leadership, including Treasury Secretary Janet Yellen and SEC Chair Gary Gensler, depart government service. As occurred in 2017, the incoming administration is expected to swiftly freeze any ongoing regulatory efforts by executive departments and independent agencies, including the SEC and FinCEN. Thus, while the January 1, 2026, deadline for investment advisers to comply with the new FinCEN rule is fast approaching, the fate of integral CIP requirements under the SEC and FinCEN’s jointly proposed rule remains in limbo. For now, that leaves investment advisers with little choice but to take steps to design and implement effective AML programs, albeit without clarity as to whether and when fundamental CIP requirements might need to be incorporated into those programs.
