Our Financial Services, Investment Funds, and White Collar, Government & Internal Investigations Teams break down the latest Financial Crimes Enforcement Network (FinCEN) rule investment advisers must prepare for.
- Investment advisers will now be included in the list of “financial institutions” under the Bank Secrecy Act
- To mitigate “illicit finance” risks, they must now maintain anti-money laundering/countering the financing of terrorism (AML/CFT) programs
- The final rule is likely to impose a heavy burden on smaller firms that do not already have AML/CFT programs
On August 28, 2024, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued two final rules.
The Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers Rule newly applies anti-money laundering/countering the financing of terrorism (AML/CFT) requirements to certain investment advisers that are registered with the Securities and Exchange Commission (SEC) and investment advisers that report to the SEC as exempt reporters. The Investment Adviser Rule was published in the Federal Register on September 4, 2024 and will become effective January 1, 2026.
The Anti-Money Laundering Regulations for Residential Real Estate Transfers Rule will require certain industry professionals to report information to FinCEN about non-financed transfers of residential real estate to legal entities or trusts that present high illicit finance risk and will become effective December 1, 2025.
After numerous failed attempts to pass similar regulations reaching back as far as 2003, the adoption of these rules marks the most significant change to the AML/CFT regulations in decades. According to Treasury Secretary Janet Yellen, “these two rules … close critical loopholes in the U.S. financial system that bad actors use to facilitate serious crimes.” In its press release, FinCEN framed the promulgation of these rules as part of an ongoing effort to combat “illicit finance” and protect U.S. national security.
The Investment Adviser Rule
In February 2024, the U.S. Treasury Department published its 2024 investment adviser risk assessment, focusing on the lack of comprehensive and uniform AML/CFT obligations within the investment adviser industry. Historically, investment advisers have not been included in the laundry list definition of “financial institution” under the Bank Secrecy Act (BSA) or its implementing regulations. As a result, investment advisers have not been required to maintain an AML/CFT program, file suspicious activity reports (SAR), or conduct customer due diligence (CDD) (including implementing a customer identification program (CIP)). According to the Treasury Department, these gaps in uniformity lead to the exploitation of the investment advisory sector by illicit actors and deprive law enforcement, regulators, and other authorities of useful information.
In an attempt to mitigate the illicit finance risks highlighted in the 2024 risk assessment, the Investment Adviser Rule:
Comments and Key Takeaways
When FinCEN published the proposed rule on this topic, many investment adviser groups stood in stark opposition – a sentiment that was clearly reflected in comments submitted in connection with the proposed rule. In response to comments received, FinCEN made several adjustments to the Investment Adviser Rule before adopting it in final form; however, the overall response to the final rule has been mixed. While some stakeholders were encouraged by FinCEN’s responsiveness to at least some comments, groups representing investment advisers maintain that the rule still presents several issues.
For example, in its official statement, the Investment Adviser Association believes the Investment Adviser Rule is “too prescriptive in certain of its specific requirements, which will make it more difficult for advisers to tailor their programs accordingly” and that it “will also impose undue burdens on smaller firms.”
Ultimately, the final rule imposes a litany of new rules and requirements, each with specific nuances. While many larger investment advisers already have AML/CFT programs in place as a best practice and to comply with contractual obligations, the final rule is likely to impose a heavy burden on smaller firms. For covered investment advisers that have not voluntarily implemented AML/CFT programs or those that are not associated with a bank or broker-dealer, these new compliance obligations will require significant time and attention. Investment advisers that have voluntarily implemented AML/CFT programs or have such programs in place as a result of a bank or broker-dealer relationship should carefully evaluate the sufficiency of the program to prepare for regulatory scrutiny.
As investment advisers prepare for the Investment Adviser Rule to take effect, covered investment advisers should:
- Consider whether they are adequately resourced to run a comprehensive AML/CFT program in house or if they should enlist a third-party administrator.
- Review existing third-party administration agreements to (1) ensure the functions the administrator has agreed to perform are in compliance with the Investment Adviser Rule; and (2) confirm the investment adviser’s ability to sufficiently oversee compliance and respond to recordkeeping and information requests.
- Review existing or develop and implement new AML/CFT program policies and procedures.
- Prepare a written response in anticipation of pushback from legal entity investors that do not wish to share beneficial ownership information.
- Develop and implement SAR and CTR monitoring and filing policies and procedures.
- Incorporate AML/CFT compliance into annual reviews in anticipation of SEC examinations in connection with the Investment Adviser Rule.
- Consider potential costs associated with implementation and maintenance of a comprehensive AML/CFT program.
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