SEC and FinCEN Propose Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers
A press release was recently issued describing a significant joint proposal by the Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN). The proposal is aimed at strengthening anti-money laundering and countering the financing of terrorism (AML/CFT) within the investment adviser sector.
Key points:
1. Purpose: The proposed rule would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish, document, and maintain written customer identification programs (CIPs). This requirement seeks to prevent illicit finance activities conducted by investment adviser clients.
2. Requirements: RIAs and ERAs would need to implement reasonable procedures to identify and verify the identity of their clients, including, but not limited to, maintaining the records used to verify a client’s identity.
3. Targeted Risks: The proposed rule would make it more difficult for criminal or illicit actors to establish client relationships, including the use of false identities to establish such relationships with investment advisers for purposes such as money laundering, financing terrorism, or other illicit activities.
4. Complementary Regulations: This proposal aligns with a separate FinCEN proposal issued in February 2024 seeking to designate RIAs and ERAs as "financial institutions" under the Bank Secrecy Act (BSA). Together, these regulations aim to safeguard the U.S. financial system by shoring up the investment advisory sector.
5. Implementation and Public Comment: If adopted, the rule would require RIAs and ERAs to implement CIPs and comply with other requirements. The proposal is open for public comment for 60 days after publication in the Federal Register.
RIAs have often been viewed as a weak link in the fight against illicit activity in the financial markets. The mandates of this proposal should not come as a surprise to advisers who have historically had far fewer requirements surrounding AML/CFT than counterparts such as banks and wirehouses. RIAs should by now be accustomed to the ever-growing requirements of their compliance programs and should remain vigilant as the compliance landscape expands over the next few years.
