United States: FinCEN Proposes AML Requirements For Registered Investment Advisers

The Financial Crimes Enforcement Network (FinCEN) has proposed long-expected regulations that would extend anti-money laundering (AML) requirements to federally registered investment advisers (RIA).1 The August 25, 2015 proposal represents the agency's second attempt to bring investment advisers under AML regulations.
 
FinCEN's proposal goes further than its prior attempt in that it would require RIAs to file suspicious activity reports (SAR) and comply with AML reporting and recordkeeping obligations as a "financial institution." Accordingly, the proposed rule may raise compliance expectations even for the many RIAs who currently maintain AML programs voluntarily. The proposal, however, would not require RIAs to implement Customer Identification Programs (CIP), despite calls by broker-dealers that FinCEN do so. FinCEN states that CIP for RIAs will be addressed in a future joint rulemaking with the SEC.

In addition, the new proposal should have examination and enforcement implications for RIAs. Once finalized, the SEC staff would be the front-line examiners for compliance with the new rules. Enforcement implications—other than exposure to FinCEN (a new regulator for RIAs)—are not yet clear because there is no SEC rule that applies AML requirements to RIAs.

Background 

FinCEN first attempted to bring investment advisers under AML regulation in 2002 and 2003, when it proposed separate rules that covered unregistered and registered investment companies, respectively. Under the 2002 proposal, FinCEN used its general rulemaking authority to define unregistered investment companies as "investment companies," an existing subcategory of "financial institutions" covered by the Bank Secrecy Act (BSA).2 Under the 2003 proposal, FinCEN used its authority under 31 U.S.C. § 5312(a)(2)(Y) to establish investment advisers as a new subcategory of "financial institutions."3 Both proposals met heavy opposition from investment advisers and the private fund industry, and were withdrawn in 2008. FinCEN said it withdrew the proposed rules in light of "developments since [the proposal dates] in industry operations as well as functional and BSA regulations."4 Another contributing factor may have been a 2006 case that invalidated the SEC's attempt to require SEC registration of hedge fund advisers.5

Since then, the 2010 Dodd-Frank Act has required many advisers to private funds to register with the SEC. The SEC has also reportedly urged FinCEN to extend AML requirements to investment advisers. As a result, industry participants have been expecting FinCEN to revive its investment adviser rules for some time. For this and other reasons, many investment advisers have already implemented some type of voluntary AML programs for several years.6  

Coverage

The proposed rule would cover all investment advisers registered or required to register with the SEC under the Investment Advisers Act of 1940. Thus, the rule generally would apply only to advisers with $100 million or more in regulatory assets under management. With limited exceptions, smaller investment advisers generally need not register with the SEC and would not be subject to the proposed rule.

The proposed coverage of only larger RIAs contrasts with FinCEN's approach for banks, broker-dealers, money transmitters and other financial institutions, which are subject to AML requirements irrespective of size.7 The proposed rule applies to all RIAs without regard to their client base or the money laundering risk of different categories of advisory activities. However, FinCEN has identified certain adviser activities as presenting lower money laundering risk (such as advising registered open- and closed-end investment companies and certain private funds), and it has requested comments on whether classes of RIAs should be excluded from the definition if they conduct low-risk activities. 

AML Program Requirements

The proposed rule would apply standard AML program requirements to RIAs by mandating internal controls, independent testing, a designated AML compliance officer and AML training. An RIA's AML program would have to be risk-based according to the "types of advisory services these entities provide." RIAs with high-risk clients or activities would be expected to devote greater resources to identify, monitor and mitigate those risks, while those with lower-risk clients or activities may adopt less extensive monitoring or other AML procedures. FinCEN also clarified that RIAs dually registered as both investment advisers and broker-dealers with the SEC need not establish multiple or separate AML programs for each line of business. Instead, such entities could establish a single, enterprise-wide AML compliance program covering those and all other financial institutions within the corporate structure.

SAR Requirements

The proposed rule would subject RIAs to substantially the same SAR requirements applicable to broker-dealers. Specifically, RIAs would have to file a SAR for transactions "conducted or attempted by, at, or through an investment adviser" (i) that involve at least $5,000; and (ii) for which the registered investment adviser "knows, suspects, or has reason to suspect" that the transaction is suspicious.

SAR timing and confidentiality requirements would also be similar to those applicable to broker-dealers. However, the proposed rule would not permit RIAs to share SARs with their controlling company or domestic affiliates, even if those affiliates are themselves subject to SAR obligations. Banks, broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities may share SARs with these entities pursuant to FinCEN guidance.8 FinCEN noted that similar guidance for RIAs "may need to be issued in a timely manner following the issuance of any final rule," suggesting that FinCEN intends to allow RIAs to share SARs with eligible affiliates. The rule proposal also explicitly states that RIAs, broker-dealers and other financial institutions subject to a SAR rule may jointly file SARs, if certain conditions are met. 

Customer Identification and Due Diligence Expectations

FinCEN states that RIAs may be "uniquely situated to appreciate a broader understanding of their client's movement of funds through the financial system." Yet the proposed rule would not require RIAs to implement a CIP. Thus, unlike banks, broker-dealers and certain other financial institutions, RIAs would not be formally required to collect, and as appropriate verify, information on each customer that opens a new account.9 FinCEN did not explain why the proposed rule lacks a CIP requirement, although the agency requested comment on that decision and indicated that CIP obligations would be extended to RIAs in a future joint rulemaking with the SEC.10

The lack of a CIP requirement may have other consequences for RIAs, as well as the broker-dealers with which they do business. Under a series of SEC no-action letters, broker-dealers today may legally rely on another financial institution to perform CIP on their behalf, but only if the other financial institution is itself subject to a CIP requirement (and certain other requirements are met).11 By not including a CIP requirement in the RIA proposal, FinCEN may have called into question whether the SEC will continue this practice.

Even without a CIP requirement, the proposed rule strongly suggests that FinCEN will expect RIAs to perform other customer due diligence (CDD). For example, FinCEN notes that registered investment advisers "would need to analyze the money laundering and terrorist financing risks posed by a particular client." In FinCEN's view, such expectations are part and parcel of the obligation to file SARs. In its 2014 proposed CDD rule, FinCEN highlighted the importance of understanding the nature and purpose of customer relationships in order to identify and report suspicious activity.12

Beneficial Ownership Expectations

The proposed rule suggests that in some cases FinCEN may expect RIAs that advise funds to look beyond the nominal client into the client's underlying investors, at least for higher-risk entities such as private funds. For example, the proposed rule states that an RIA may be required to look at "the underlying investors of a client" to assess the money laundering risks of a private fund or other unregistered pooled investment vehicle. FinCEN also states that an RIA "should have access to information about the identities and transactions of the underlying or individual investors" in such entities. These statements contrast with FinCEN's position in its proposed CDD rule. There, FinCEN stated that for purposes of the beneficial ownership requirement, "if an intermediary is the customer" and the bank, broker-dealer or other covered financial institution "has no CIP obligation with respect to the intermediary's underlying clients pursuant to existing guidance" then the covered financial institution "should treat the intermediary, and not the intermediary's underlying clients, as its legal entity."13 

Investment Advisers as "Financial Institutions"

FinCEN also proposes to incorporate RIAs into the AML regulations' definition of "financial institution." These financial institutions are subject to additional AML regulations beyond the core AML program requirements. For example, as financial institutions, RIAs would be required to adhere to the Recordkeeping and Travel Rules. These rules require financial institutions to create and retain for five years records for transmittals of funds exceeding $3,000, and ensure that certain information pertaining to the transmittal of funds "travel" with the transmittal to the next financial institution in the payment chain.

As financial institutions, RIAs also would be required to respond to law enforcement requests regarding accounts or transactions for named suspects under Section 314(a) of the USA Patriot Act, and they would be permitted to participate in optional information sharing with other "financial institutions" under Section 314(b) of the Act. Finally, RIAs would be required to file currency transaction reports (CTR) instead of IRS Form 8300 (the current requirement) for certain currency transactions of more than $10,000. 

Examination and Enforcement Implications

Because FinCEN does not have its own examination staff, it routinely delegates examination—but not enforcement—responsibilities to federal functional regulators and self-regulatory organizations (SROs).14 The proposed rule adopts this traditional approach. However, unlike broker-dealers which are subject to examination by their SRO, the Financial Industry Regulatory Authority (FINRA), RIAs do not have an SRO. Therefore, SEC staff will be the sole examination authority for these new requirements.

It is not clear if this approach will provide effective coverage of the investment adviser sector. The rule proposal states that "the SEC is in the best position to act as the designated examiner" because it "has expertise in the regulation of investment advisers." However, RIAs are not under a mandatory examination cycle, unlike banks. And in 2014, the SEC was able to examine only 10 percent of RIAs.15 The full enforcement implications of this proposal are likewise not yet known. FinCEN may impose civil penalties for violations of the proposed rule. However, unlike with broker-dealers, there is no SEC rule that applies AML requirements to RIAs.16 Therefore, the SEC's enforcement authority for the proposed rule is at best uncertain.

Public Comments

FinCEN has invited public comments on all aspects of the proposed rule, but specifically seeks comment on several issues, including: the proposed definition of investment adviser; the application of CIP; the proposed AML programmatic requirements for investment advisers; and the proposed suspicious activity reporting requirement. Comments are due November 2.

Effective Date

The proposed rule states that covered RIAs will be required to develop and implement the requisite AML program within six months of the effective date of the final rule. Given the likely volume of comments to be submitted and other regulatory priorities, it may be some time before FinCEN adopts a final version of this proposal. 

Footnotes

1 Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers, 80 Fed. Reg. 52,680 (Sept. 1, 2015).

2 See Anti-Money Laundering Programs for Unregistered Investment Companies, 67 Fed. Reg. 60,617 (Sept. 26, 2002).

3 See Anti-Money Laundering Programs for Investment Advisers, 68 Fed. Reg. 23,646 (May 5, 2003).

4 See Withdrawal of the Notice of Proposed Rulemaking; Anti-Money Laundering Programs for Unregistered Investment Companies, 73 Fed. Reg. 65,569, 65,571 (Nov. 4, 2008); and Withdrawal of the Notice of Proposed Rulemaking; Anti-Money Laundering Programs for Investment Advisers, 73 Fed. Reg. 65,568, 65,569 (Nov. 4, 2008).

5 Goldstein, et al. v. Securities and Exchange Commission, 451 F.3d 873 (D.C. Cir. 2006).

6 Some RIAs have voluntarily developed AML programs as part of their provision of services to mutual funds. Mutual funds are required to have AML programs and may "contractually delegate the implementation and operation of [the mutual fund's] anti-money laundering program to another affiliated or unaffiliated service provider . . . ." See 31 C.F.R. Part 1024 (AML Rules for Mutual Funds); Anti-Money Laundering Programs for Mutual Funds, 67 Fed. Reg. 21,117, 21,119 (Apr. 29, 2002).

7 AML requirements for a few other types of financial institutions have size thresholds, but these are generally intended to exclude only the smaller such institutions. E.g., 12 C.F.R. Part 1021 (Casinos with gross annual gaming revenue exceeding $1 million must have an AML program); 12 C.F.R. Part 1022 (Dealers in foreign exchange in excess of $1,000 per person, per day must have an AML program).

8 See Sharing Suspicious Activity Reports by Securities Broker-Dealers, Mutual Funds, Futures Commission Merchants, and Introducing Brokers in Commodities with Certain U.S. Affiliates, FIN-2010-G005 (Nov. 23, 2010) and Sharing Suspicious Activity Reports by Depository Institutions with Certain U.S. Affiliates, FIN-2010-G006 (Nov. 23, 2010).

9 Such information includes, at a minimum, name, address and SSN/TIN, as well as date of birth for individuals.

10 The set of requirements under the proposed rule is similar to AML requirements imposed on non-bank residential mortgage lenders and originators and the housing government sponsored enterprises. Requirements for those entities include AML program and SAR requirements, but do not include a CIP. See 31 C.F.R. Part 1029 (rules for non-bank residential mortgage lenders and originators) and 31 C.F.R. Part 1030 (rules for housing government sponsored enterprises).

11 See e.g. Letter from Lourdes Gonzalez, Assistant Chief Counsel, Division of Trading and Markets, SEC, to Ira M. Hammerman, Executive Vice President and General Counsel, Securities Industry and Financial Markets Association, dated Jan. 9, 2015; Letter from Emily Westerberg Russell, Senior Special Counsel, Division of Trading and Markets, SEC, to Ira Hammerman, Senior Managing Director and General Counsel, Securities Industry and Financial Markets Association, dated Jan. 11, 2013; Letter from Robert L.D. Colby, Acting Director, Division of Market Regulation, SEC, to Alan Sorcher, Securities Industry Association, dated July 11, 2006.

12 See 79 Fed. Reg. 45,151, 45,163 (Aug. 4, 2014).

13 79 Fed. Reg. at 45,161.

14 31 C.F.R. § 1010.810.

15 Testimony of SEC Chairwoman Mary Jo White before the Subcommittee on Financial Services and General Government Committee on Appropriations (May 5, 2015).

16 17 C.F.R. § 240.17a-8.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Matthew A. Chambers
Katrina Carroll
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions