Key Takeaways:
- On August 28, 2024, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued its final rule requiring certain investment advisers to implement anti-money laundering (“AML”) compliance procedures, one of the more significant recent AML regulatory developments.1
- FinCEN’s final rule ("the new FinCEN Rule”) will require some registered investment advisers (“RIAs”) as well as exempt reporting advisers (“ERAs”) to develop procedures that satisfy the requirements under the Bank Secrecy Act (“BSA”) for anti-money laundering and countering the financing of terrorism (“AML/CFT”) policies and procedures.
- The rule also applies to foreign investment advisers when their activities occur within the U.S. or when they provide services to a U.S. person or a foreign-located private fund involving a U.S. investor.
- The rule does not apply to state-registered investment advisers or family offices.
- Covered investment advisers have until January 1, 2026, to comply with the new rule.
- FinCEN’s final rule included exemptions for several types of investment advisers that would otherwise be covered, such as mid-size and family advisers, pension consultants, multi-state advisers, and RIAs that do not report any assets under management on Form ADV.
The FinCEN Rule: Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers
FinCEN has become increasingly concerned that the lack of comprehensive, uniform AML/CFT standards across the investment adviser industry has left it vulnerable to exploitation by illicit actors seeking to access the U.S. financial system to facilitate unlawful activity. The new FinCEN Rule requires covered investment advisers to implement an AML/CFT compliance program and to satisfy enhanced reporting requirements in order to comply with FinCEN anti-money laundering practices.
A. Covered Investment Advisers
Investment advisers covered by the new FinCEN Rule are defined as any person, wherever located, who:
(i) is registered or required to register with the Securities and Exchange Commission (“SEC”)2, or
(ii) who is exempt from SEC registration as a venture capital fund adviser3 or a private fund adviser.4
However, a certain number of investment advisers are exempted from this rule, including:
(i) mid-sized advisers5,
(ii) pension consultants6,
(iii) multi-state advisers7, and
(iv) RIAs who do not report any assets under management8 on their most recently filed Form ADV.
Additionally, foreign investment advisers will be subject to these AML/CFT requirements only with respect to their advisory activities that:
(i) take place within the U.S., including through involvement of U.S. personnel of the investment adviser, such as the involvement of an agency, branch, or office within the U.S., or
(ii) provide advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person.
B. The AML/CFT Program
On or before January 1, 2026, covered investment advisers will need to develop a written AML/CFT program that is risk-based and reasonably designed to prevent such investment advisers from being used for money laundering, terrorist financing, or other illicit finance activities and to achieve and monitor compliance with the applicable AML/CFT requirements. Each program must be approved in writing by its board of directors or trustees, or if it does not have one, by its sole proprietor, general partner, trustee, or other persons that have functions similar to a board of directors. An investment adviser must also make its AML/CFT program available for inspection by FinCEN or the SEC.
To minimize the creation of duplicative AML/CFT programs at multiple entities, FinCEN indicates that an investment adviser, as part of its risk-based approach, may exclude from the scope of its program any mutual funds, collective investment funds or other investment advisers that are themselves subject to this rule, because those entities are subject to their own AML/CFT obligations.
The AML/CFT program must, at minimum, contain the following components:
1) Established and implemented internal policies, procedures, and controls reasonably designed to prevent the investment adviser from being used for illicit finance activities;
- FinCEN is not requiring a one-size-fits-all approach. Rather, FinCEN expects investment advisers to utilize a risk-based approach to design a compliance program that is appropriate for the size and scale of the particular adviser. This would include ascertaining the risk profile of customers, incorporating Know Your Client (“KYC”) or Customer Due Diligence (“CDD”) practices, and developing tailored procedures to apply their compliance resources where needed to address those areas of risk, and adapting to new risk areas as they emerge. FinCEN is allowing room for investment advisers to contractually delegate some compliance implementation and operations to, for example, fund administrators, but the investment adviser remains legally responsible for compliance.
- Additionally, there is an express acknowledgement that the CDD aspect of the rule is going to interact with the Corporate Transparency Act (“CTA”) and that the CDD rule is currently being revised before its implementation will be expected.
2) Independent testing for compliance to be conducted by the investment adviser’s personnel or by a qualified outside party;
- This concept is similar to the periodic testing of internal controls surrounding trading, customer assets, and books and records: FinCEN expects that the program not simply look good on paper, but instead is periodically examined to provide confidence that it is operating effectively. That said, FinCEN acknowledges the potential burden that this requirement might carry and recognizes that such testing does not have to be performed by a third-party service provider, but instead can be performed by internal resources.
3) Designated person or persons responsible for implementing and monitoring the operations and internal controls of the program; and
- FinCEN expects investment advisers to designate an individual (or individuals) with sufficient knowledge of the AML/CFT rules and BSA requirements for AML programs to serve as a compliance officer (or officers) with the responsibilities listed above. Whether an individual is qualified depends in part on the investment adviser’s risk profile, and the designated compliance officer must understand the investment adviser’s activities and be able to adapt the new AML/CFT program to address the risks from those activities. The compliance officer may not have conflicting responsibilities or other duties that adversely impact his or her ability to perform the duties of a compliance officer.
4) Ongoing training for personnel exposed to risk-based activities.
- As with other compliance regimes, FinCEN expects investment advisers to conduct periodic training for key employees.
C. The Reporting Requirements
Covered investment advisers must file a Suspicious Activity Report (“SAR”) to FinCEN no more than 30 calendar days after the date of the initial detection by the reporting investment adviser of any suspicious transaction relevant to a possible violation of law or regulation.
Suspicious transactions include any transaction attempted or conducted by, at or through an investment adviser involving or aggregating funds or other assets of at least $5,000.00, if the investment adviser knows, suspects, or has reason to suspect that the transaction:
(i) involves funds derived from illegal activity or is intended to hide or disguise funds or assets derived from illegal activity (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation;
(ii) is designed, whether through structuring or other means, to evade any requirements of this chapter or any other regulations promulgated under the BSA;
(iii) has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the investment adviser knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or
(iv) involves use of the investment adviser to facilitate criminal activity.
If no suspect is identified on the date of such initial detection, an investment adviser may delay filing a SAR for an additional 30 calendar days to identify a suspect, but in no case shall reporting be delayed more than 60 calendar days after the date of such initial detection. Where more than one adviser has an obligation to report, FinCEN allows for the submission of joint reports. For situations requiring immediate attention (i.e. suspected terrorist financing or ongoing money laundering schemes), an investment adviser must immediately notify by telephone an appropriate law enforcement authority in addition to filing a SAR. Investment advisers making such reports will also have the provided protection of a safe harbor.9
A copy of the SAR must be retained by the investment adviser or on its behalf along with any and all supporting documentation for a period of five years from the date of filing the SAR. Such supporting documentation will be available to FinCEN or any appropriate local, state or federal law enforcement or regulatory authority, upon request.
Lastly, investment advisers, and any current or former director, officer, employee, or agent of any investment adviser, cannot disclose a SAR or any information that would reveal the existence of a SAR. Any investment adviser that is subpoenaed or otherwise requested to disclose a SAR or any information that would reveal the existence of a SAR, must decline and notify FinCEN of any such request and the response.10 Similarly, government authorities or any current or former director, officer, employee, or agent of such government authorities cannot disclose a SAR or any information that would reveal the existence of a SAR, except as necessary to fulfill official duties.
D. Additional Recordkeeping and Reporting
Under the new FinCEN Rule, covered investment advisers are required to file CTRs (31 CFR 1010.310-315) and must adhere to the recordkeeping and travel rules in 31 CFR 1010.410(e) and (f). Previously, investment advisers were required to file IRS form 8300 (similar to CTRs). The new FinCEN Rule also requires covered investment advisers to obtain and retain originator and beneficiary information for certain transactions and pass on this information to the next financial institution in certain funds transmittals involving more than one financial institution.11 All foreign-located investment advisers must also make records and reports regarding their activities covered by this rule available for inspection by FinCEN or the SEC.
Additionally, FinCEN’s regulations enable law enforcement agencies, through FinCEN, to make information requests of financial institutions to locate accounts and transactions of persons that may be involved in terrorism or money laundering.12 These FinCEN requests contain subject and business names, addresses, and as much identifying data as possible to assist the financial institution in searching its records. The FinCEN Rule expands this program to allow these requests to be made to investment advisers.
Lastly, for situations involving correspondent or private banking accounts established, maintained, administered or managed in the U.S. for a foreign financial institution, FinCEN requires covered investment advisers to establish special due diligence measures that include policies, procedures, and controls that are reasonably designed to enable the investment adviser to detect and report, on an ongoing basis, any known or suspected money laundering or suspicious activity.
Assessment of the New FinCEN Rule
The oversight of the investment adviser industry by federal and state securities regulators has been broadly focused on protecting investors and the overall securities market from fraud and manipulation. Investment advisers were generally not subject to comprehensive AML/CFT regulations and were not examined for such compliance. According to its recent 2024 Investment Adviser Risk Assessment, however, The U.S. Treasury Department determined that investment advisers have been particularly vulnerable to illicit finance threats due to a weaker or non-existent client due diligence. Indeed, the lack of applicable AML/CFT regulations combined with an asymmetry of information for regulators due in part to the investment adviser sector being segmented by intermediaries have made it difficult to provide adequate safeguards from such illicit activity.
FinCEN has stated that its new rules are designed to build out internal controls, due diligence, and reporting requirements to safeguard against investment advisers being used to conduct illicit finance activity or circumvent regulatory controls.
These AML/CFT requirements are supposed to mirror most current compliance programs already in place for banks and broker-dealers under the BSA, but FinCEN has noted that investment advisers have some flexibility under the new rules to scale their programs to address the risk in their operations (which, presumably, is significantly less than those of banks). Nevertheless, some commentators are concerned that implementing AML/CFT requirements would be too costly and burdensome to investment advisers who do not necessarily have the resources to effectively implement such requirements. There is no doubt that the initial implementation of these rules will pose a burden on many smaller investment advisors, but it remains to be seen if, once implemented, the rules will continue to pose a significant burden. At the same time, FinCEN will undoubtedly monitor the implementation of these new rules by the investor adviser community and continue to assess their efficacy in combating money laundering.
1 FinCEN also issued a final rule imposing AML/CFT obligations and reporting requirements on certain participants in the residential real-estate sector.
2 Under Section 203 of the Investment Advisers Act.
3 Under Section 203(l) of the Investment Advisers Act.
4 Under Section 203(m) of the Investment Advisers Act.
5 As set forth in Section 203A(a)(2)(B) of the Investment Advisers Act.
6As defined under 17 CFR 275.203A-2(a).
7As defined under 17 CFR 275.203A-2(d).
8As defined under Section 203A(a)(3) of the Investment Advisers Act.
9The safe harbor will provide protection from civil liability for making either required or voluntary reports of suspicious transactions, or for failures to provide notice of such disclosure to the full extent of 31 U.S.C. 5318(g)(3).
10When declining to respond to a subpoena, investment advisers should cite to the FinCEN Rule’s section (31 CFR § 1032.320()(d)(1)) and 31 U.S.C. 5318(g)(2)(A)(i). Note that the prohibition on disclosures by investment advisers should not be constructed to prohibit such disclosures for the purposes of (i) examining the investment adviser for compliance with the BSA, (ii) the underlying facts, transactions or documents upon which the SAR is based on, or (iii) to fulfill official duties consistent with Title II of the BSA.
11In accordance with subpart D of part of 31 CFR §1010.
12Section 314(a) of the USA PATRIOT Act of 2001.
