Who may be interested: Investment Advisers; Closed-End Funds; and Directors of Closed-End Funds

Quick Take: The U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a notice of proposed rule making (Proposed Rule) which would include registered investment advisers and exempt reporting advisers (Advisers) under the definition of a “financial institution” under the Bank Secrecy Act (BSA). The Proposed Rule would also: (i) establish certain minimum standards for anti-money laundering (AML) and countering the financing of terrorism (CFT) programs to be established by Advisers, (ii) require Advisers to file suspicious activity reports (SARs) and Currency Transaction Reports (CTRs) with FinCEN, and (iii) require Advisers to maintain records relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule under the BSA).

Under the Proposed Rule, Advisers would be required to develop and implement a written AML/CFT program that is risk-based and reasonably designed to prevent the Adviser from being used for money laundering, terrorist financing, or other illicit finance activities. At a minimum such programs must:

1. establish and implement policies, procedures, and internal controls reasonably designed to prevent money laundering, terrorist financing, and other illicit finance activities;

2. provide for independent testing of the AML/CFT program by the Adviser’s personnel or a qualified outside party;

3. designate a person or persons to be responsible for implementing and monitoring the operations and internal controls of the AML/CFT program;

4. provide for ongoing training of appropriate personnel of the Adviser; and

5. implement risk-based procedures for conducting ongoing customer due diligence.

Unlike prior proposals, the Proposed Rule would cover registered investment advisers and exempt reporting advisers. In recognition of the history and development of AML programs in the financial services industry, and the fact that many affiliates are covered under other current rules, the Proposed Rule would not require Advisers to apply their AML/CFT program to mutual funds they advise, as mutual funds are covered under their own AML programs. Similar recognition is not included for closed-end funds or wrap fee programs, even though those products are transacted through broker-dealer platforms that have independent AML compliance obligations. In addition, the Proposed Rule would impose a broader requirement for SAR and CTR filings, based on client activities, and suggests that firms would need to understand more about their clients than would be observed merely from purchase and sale transactions.

FinCEN’s Proposed Rule will be available for public comment until April 15, 2024.

FinCEN’s Proposed Rule is available here.