Who may be interested: Investment Advisers

Quick Take: On May 13, 2024, the SEC and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) jointly proposed a new rule that would require certain investment advisers to establish customer identification programs (CIPs). A CIP would need to include risk-based procedures for verifying the identity of each client and enable a registered investment adviser (RIA) to form a reasonable belief – based on its assessment of relevant risks – that it knows the true identity of each client.

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The proposed rule would apply to RIAs and exempt reporting advisers (ERAs) and would require RIAs and ERAs to establish, document, and maintain written CIPs. This proposed rule complements a separate February 2024 notice of proposed rulemaking which would, among other things, require RIAs and ERAs to develop and implement anti-money laundering programs and subject them to suspicious activity report filing obligations.

Under the proposed rule, an adviser would be required to implement reasonable procedures to identify and verify the identity of its customers. A “customer” for this purpose would be any person who opens a new account with the adviser, and an “account” would be defined to include any contractual or other business relationship between a person and the adviser.

Specifically, RIAs and ERAs would be required to establish:

• A written CIP;
• Risk-based identity verification procedures for customers who open accounts, which include:
  • prior to opening an account, collection of minimum identifying information of customers (name, date of birth/formation, address, and identification number); and
  • within a reasonable time before or after the customer’s account is opened; verification of the identity of each customer, using the information collected above, through documentary (such as viewing a government ID) or non-documentary (such as independent verification with public databases) means;
• Procedures for making and maintaining a record of information collected under the CIP, as well as the verification;
• Procedures for determining whether a customer appears on any list of known or suspected terrorists or terrorist organizations issued by any federal government agency and designated as such by the Treasury Department in consultation with federal functional regulators; and
• Procedures for providing customers with adequate notice that the adviser is requesting information to verify their identities.

The proposed rule is generally consistent with existing requirements for other financial institutions, such as banks, broker-dealers and open-end investment companies (such as mutual funds). In a departure from the approach taken with respect to the CIP requirements applicable to mutual funds, the proposed rule would require an adviser to apply its CIP to all accounts, including accounts opened for the purpose of participating in an employee benefit plan established pursuant to ERISA.

In addition, the SEC’s proposing release indicates that the CIP would only require advisers to collect and verify the identity of a customer that directly opens and holds an account with the adviser. For an adviser advising a private fund, the proposed rule would not require the adviser to look through its private fund client to the underlying investors in the fund. Rather, the proposed rule would require the adviser to verify the identifying information of the private fund itself. A similar concept would apply to trust accounts.

Comments on the proposed rule are due by July 22, 2024.

The press release for the rule proposal can be found here.