The Bank Secrecy Act (“BSA”) establishes program, recordkeeping, and reporting requirements for certain financial institutions to combat and detect money laundering, terrorist financing, and other illicit activities.  On February 13, 2024, FinCEN proposed a new rule which expands the scope of the BSA to include certain investment advisers, which currently are not subject to any federal or state regulations regarding anti-money laundering “AML” or counter-financing of terrorism (“CFT”) compliance.  FinCEN also published a fact sheet on the rule which provides a helpful summary of the proposed rule’s key provisions.

Why Now?

FinCEN has proposed rules to include investment advisers within the BSA requirements twice before, most recently in 2015.  In its current proposal, FinCEN notes that the investment adviser industry’s assets under management have nearly doubled since its 2015 proposal.  This expansion, FinCEN notes, supports the need for their current proposal.

Concurrently with FinCEN rule proposal, Treasury issued its report entitled 2024 Investment Adviser Risk Assessment.  The Risk Assessment report reviews the investment adviser market structure and regulatory framework, identifies risks, current mitigation measures, and what risks remain, the latter area supporting the need for additional AML controls in this area.  The report states: “This assessment finds that the highest illicit finance risk in the investment adviser sector is among [Exempt Reporting Advisers] ERAs …, followed by RIAs who advise private funds, and then RIAs who are not dually registered as, or affiliated with, a broker-dealer (or is, or affiliated with, a bank).”[1]

Who’s Covered under the Proposal

Under the new rule, investment advisers subject to the requirements pursuant to the BSA include: (1) investment advisers that are registered or required to registered with the SEC (“RIAs”) and (2) investment advisers that report to the SEC as Exempt Reporting Advisers (“ERAs”) under the Investment Advisers Act of 1940 (“Advisers Act”).  An adviser may qualify as an ERA if (i) it solely advises “private funds”[2] and has assets under management in the United states of less than $150 million or (ii) it solely advises “venture capital funds.”[3]  While ERAs are not required to register with the SEC, they do have certain SEC reporting obligations and are subject to certain SEC compliance requirements.

Investment advisers who advise registered mutual funds would not have to apply their AML/CFT program or SAR reporting requirements (defined and discussed below) to their mutual fund clients because mutual funds are already subject to separate BSA obligations.  

Notably, FinCEN explicitly states in the NPRM that it would not expect an investment adviser that is dually registered as a bank or a broker-dealer to adopt multiple or separate AML/CFT programs.  Similarly, FinCEN notes that an investment adviser affiliated with, or a subsidiary of, a bank or a broker-dealer would not be required to implement multiple or separate programs as one single program can be extended to all affiliated entities that are subject to the BSA, so long as it is designed to identify and mitigate the different money laundering, terrorist financing, and other illicit finance activity risks posed by the different aspects of the entity’s business

The Proposed Rule’s Basic Requirements

The proposed rule requires certain investment advisers to, among other things:

• implement an AML/CFT program, including (1) developing internal policies, procedures, and controls to comply with the requirements of the BSA; (2) designating an AML compliance officer; (3) conducting ongoing training; (4) conducting an independent test of the AML program; and (5) conducting ongoing customer due diligence;
• file Suspicious Activity Reports (“SARs”) and Currency Transaction Reports (”CTRs”);  
• keep records relating to the transmittal of funds; and
• fulfill other obligations under the BSA, including responding to Section 314(b) requests and having the ability to participate in voluntary information sharing with other covered financial institutions under Section 314(b).

Investment advisers would also be subject to the information-sharing provisions of the BSA as well as the “special measures” imposed by FinCEN pursuant to section 311 of the USA PATRIOT Act.

What’s Not Included

As discussed above, the new rule would only apply to RIAs and ERAs; however, FinCEN may consider future rules to expand the application of the BSA to include other types of investment advisers or similar entities not currently covered under the proposed definition.  Notably, state registered investment advisers are not covered by this proposal because the Treasury risk assessment found “few examples of State-registered investment advisers being misused for money laundering, terrorist financing, or other illicit financial activities.”[4]  FinCEN did note, however, that it would continue to monitor activity involving State-registered investment advisers for indicia of such activities.

The proposed rule also does not include a customer identification program requirement or an obligation to collect beneficial ownership information (“BOI”) for legal entity customers, although FinCEN is working with the SEC on a joint CIP Rule proposal that may apply these requirements to RIAs and ERAs.  This approach is consistent with the CIP Rule for broker-dealers, which was issued jointly by FinCEN and the SEC in 2003.  Regarding BOI for legal entity customers, FinCEN notes that it will be addressing this requirement in a future rulemaking.  We expect that this will occur when FinCEN amends the current requirements for covered financial institutions to obtain such information for legal entity customers at account opening to reduce the duplicative requirements that now exist due to the implementation of the Corporate Transparency Act rules requirement BOI reporting to FinCEN.

Timing

The comment period for the proposed rule is open until April 15, 2024. 

Covered investment advisers would be required to comply with the rule on or before 12 months from the final rule’s effective date.

[1] Department of Treasury, 2024 Investment Adviser Risk Assessment, February 13, 2024, at 2.

[2] See Advisers Act Rule 203(m)-1.

[3] See Section 203(l) of the Advisers Act.

[4] Financial Crimes Enforcement Network: Anti-Money Laundering/ Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers, 89 Fed. Reg. 12,117 (Feb. 15, 2024).