Investment Advisers’ May Have New AML Obligations Under FinCEN Proposed Rule

Last month, the Financial Crimes Enforcement Network (FinCEN) released notice of a proposed rule that would impose new requirements on certain investment advisers under the Bank Secrecy Act (BSA). Specifically, the new rule would include some advisers within the rule’s definition of “financial institution,” thereby bringing those new advisers within the scope of the rule, which sets out requirements for complying with the US Treasury Department’s counter-terrorism financing and anti-money laundering (collectively, “AML”) program.  FinCen proposed a similar rule in 2015, but that rule never became effective.

This proposed rule is another step in a larger effort by FinCen to collect more relevant information that would allow for better AML enforcement and follows on the heels of the Corporate Transparency Act (“CTA”), which became effective on January 1, 2024. The CTA requires most US companies to submit reports relating to the beneficial ownership of the company. The impetus for the new rule proposal, according to a statement issued by FinCEN’s director, is the concern that foreign adversaries may be taking advantage of vulnerabilities within the US financial system, and a recognition that, collectively, US advisers manage many trillions of dollars.

The BSA provisions apply to “financial institutions,” which currently do not include investment advisers. However, FinCEN is authorized to add to the definition any businesses that engage in activities that are “similar to, related to, or a substitute for” activities of the defined financial institutions, which include banks, broker-dealers and insurance companies. The new rule, if adopted, would amend the definition of a “financial institution” under the existing regulations. The new definition would encompass all SEC-registered investment advisers and all exempt reporting advisers. State-registered advisers and any advisers that rely upon the exemption for foreign private advisers.

If it becomes effective, the new rule will impose new AML requirements on the impacted advisers, including the requirement to implement and maintain a risk-based AML program, to report suspicious activity to FinCEN and to meet certain recordkeeping requirements. Advisers would have to conduct ongoing due diligence in addition to the initial due diligence required upon the establishment of client relationships. The rule would broadly apply to all types of client relationships, including private funds and sub-advisory relationships.

Firms will also be required to designate an AML compliance officer, to conduct ongoing employee training, and to impose a program to independently audit the program. The rule will also subject the adviser to the possibility of civil penalties and other sanctions for noncompliance.

Interested parties may submit comments on the proposed rule on or before April 15, 2024.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.

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