The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued a new notice of proposed rulemaking (NPRM), referred to herein as the “Proposed Rule,”1 that would subject SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to anti-money laundering (AML) and counter terrorist financing (CTF) compliance requirements under the Bank Secrecy Act (BSA).
Among other requirements, the Proposed Rule would require RIAs and ERAs to a) develop and implement an AML/CTF compliance program (AML program) within 12 months after the effective date of a final rule and b) monitor for and report suspicious activity to FinCEN. FinCEN proposes to delegate its authority for examining compliance with the Proposed Rule’s requirements to the SEC. FinCEN has solicited comments on the Proposed Rule through April 15, 2024.
Background
The BSA, as amended by the USA PATRIOT Act (PATRIOT Act), requires “financial institutions” to maintain an AML program with minimum requirements, including: the development of internal policies, procedures and controls, appointment of a compliance officer, an ongoing employee training program, an independent testing function and procedures for conducting ongoing customer due diligence. The BSA imposes on financial institutions certain recordkeeping and travel rules applicable to transmittals of funds that equal or exceed $3,000 (Recordkeeping and Travel Rules). Currently, the definition of “financial institution” does not cover RIAs or ERAs, and as a result, RIAs and ERAs generally have been exempt from most AML program requirements under U.S. law.
In 2015, FinCEN issued a similar NPRM that would have extended AML program requirements to certain investment advisers, but excluded ERAs. However, the 2015 NPRM was never finalized and has now been formally withdrawn by FinCEN simultaneous with the issuance of the Proposed Rule.
Proposed Rule
The Proposed Rule seeks to amend the BSA implementing regulations to add certain “investment advisers” (i.e., RIAs and ERAs) to the definition of “financial institution,” which would extend certain due diligence, recordkeeping and reporting obligations to RIAs and ERAs. However, the Proposed Rule would not apply to 1) state-registered investment advisers that are not eligible for SEC registration, 2) certain advisers that are not technically “investment advisers” (e.g., certain real estate funds that to not provide advice regarding “securities”) and 3) foreign private advisers.
AML Program Under Proposed Rule
The Proposed Rule would require RIAs and ERAs to adopt an AML program that includes, at a minimum, the following requirements:
- implementation of policies, procedures and controls reasonably designed to a) detect money laundering and other illicit financial activity, and b) comply with other applicable provisions of the BSA
- appointment of one or more AML compliance officers
- provision of ongoing AML training for appropriate personnel
- independent testing of the AML program
- risk-based procedures for conducting ongoing customer due diligence to a) understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile and b) identify and report suspicious transactions and, on a risk-basis, maintain and update customer information
RIAs and ERAs would still have flexibility to tailor their AML programs to the specific risks associated with their businesses.
Suspicious Activity Reporting
The Proposed Rule would impose a suspicious activity reporting requirement for RIAs and ERAs. A transaction attempted by, at or through an RIA or ERA would be subject to reporting if:
- the transaction involves or aggregates funds or other assets of at least $5,000
- the adviser knows, suspects or has reason to suspect that the transaction (or a related pattern of transactions):
- involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity
- is designed to evade any BSA reporting requirement
- has no business or apparent lawful purpose or is not the sort in which the customer would normally be expected to engage and the investment adviser knows of no reasonable explanation for the transaction after examining the available facts or
- involves use of the investment adviser to facilitate criminal activity
Additionally, although not required, the Proposed Rule would encourage the voluntary reporting of other suspicious transactions, such as those that do not meet the $5,000 threshold.
Recordkeeping and Travel Rules
The Proposed Rule would require RIAs and ERAs to comply with the Recordkeeping and Travel Rules, to the extent the business model of an RIA or ERA causes them to engage in transactions within the scope of these rules.
Special Information-Sharing Procedures
The Proposed Rule would bring RIAs and ERAs under the coverage of FinCEN’s rules implementing the special information-sharing procedures of Section 314 of the PATRIOT Act. These provisions would require that an RIA or ERA, upon request from FinCEN, be able to search its records to determine whether the RIA or ERA maintains any account for, or has engaged in any transaction with, a party named in FinCEN’s request.
Special Measures
Inclusion of RIAs and ERAs in the definition of “financial institution” would subject these advisers to Section 311 of the PATRIOT Act, whereby RIAs and ERAs would be required to implement certain “special measures” if the U.S. Treasury Secretary determines that a foreign jurisdiction, institution, class of transaction or type of account is a “primary money laundering concern.”
Special Standards for Diligence
Inclusion of RIAs and ERAs in the definition of “financial institution” would also subject these advisers to Section 312 of the PATRIOT Act, whereby RIAs and ERAs would be required to maintain due diligence programs for correspondent accounts for foreign financial institutions and private banking accounts established or maintained for non-U.S. persons.
Conclusion
The Proposed Rule is an initial step toward requiring RIAs and ERAs to comply with the AML/CTF requirements applicable to other financial institutions. FinCEN specifically requested comments on whether ERAs should be considered covered investment advisers for purposes of the AML program requirements. RIAs and ERAs should take a close look at the Proposed Rule to identify potential opportunities to comment on components of the Proposed Rule.
Notes