FinCEN: Eyes on Investment Advisers

Morrison & Foerster LLP

In July 2020, a sensitive Federal Bureau of Investigation (FBI) document was leaked to the public. The document outlined the FBI’s suspicions that the private investment funds industry was providing choice money laundering vehicles for bad actors. In the report, the FBI called for regulatory action in response. Four years later, the Financial Crimes Enforcement Network (FinCEN) has answered the call, with a February 15th Notice of Proposed Rulemaking (NPRM).

The NPRM is aimed at strengthening the U.S. financial system against potential abuse and exploitation by criminals and foreign adversaries. In particular, it proposes to expand the definition of “financial institution” under the Bank Secrecy Act (BSA) to include both registered investment advisers (RIAs) and exempt reporting advisers (ERAs and, collectively with the RIAs, the “Covered Investment Advisers”), thereby requiring them to implement anti-money laundering and countering financing of terrorism (AML/CFT) programs. These AML/CFT programs would require Covered Investment Advisers to meet certain recordkeeping and reporting requirements.

In conjunction with other government efforts to minimize the AML/CFT risks brought on by shell companies and all-cash transactions, the proposed rule aims to increase transparency around funds entering the U.S. economy, and aid law enforcement in identifying bad actors.


The U.S. Department of the Treasury (“Treasury”) has long recognized the AML/CFT risks in the investment adviser space. In 2021, the U.S. Strategy on Countering Corruption (“Strategy Report”) noted that numerous bad actors, including corrupt officials and sanctioned individuals, leveraged investment advisers to invest in the United States and also to access sensitive U.S. information with national security implications. This risk was also noted in the 2022 National Money Laundering Risk Assessment. In 2024, Treasury issued a dedicated Investment Adviser Risk Assessment, which emphasized how private funds are “an attractive entry point for illicit proceeds” and the risk posed by patchwork inclusion of investment advisers in the AML/CFT regulatory regime.

In fact, in 2002 and again in 2003, FinCEN proposed rules that would have subjected certain investment companies[1] or advisers[2] to BSA requirements. In 2015, FinCEN again proposed a rule to regulate certain investment advisers,[3] which was never finalized and which the NPRM proposes to withdraw. Notably, the move to include ERAs in the scope of Covered Investment Advisers was not previously proposed and is a marked change for the private funds industry.

Presently, federal and state securities regulators focus on preventing fraud and manipulation and protecting investors, rather than focusing on AML/CFT. The Strategy Report noted that AML/CFT requirements are unevenly applied across the investment advisor sector and certain investment advisers have no obligation to inquire about sources of wealth or report suspicious activity to law enforcement. As a result, bad actors can exploit this gap by choosing advisers based on whether they will need to comply with AML/CFT requirements. The NPRM lists additional reasons why investment advisers present prime money laundering and terrorist financing opportunities, among them, that these advisers often rely on third parties to conduct compliance, some of which are located abroad and take varied approaches to compliance. With exponential growth in the investment adviser space, FinCEN seeks to bring the U.S. regulatory scheme in line with those of its international counterparts and address the issues that have been raised in recent years.


Who is Covered?

The NPRM would categorize Covered Investment Advisers as financial institutions under the BSA, subjecting them to AML/CFT requirements. As drafted, the NPRM does not capture state-registered investment advisers.[4]

What New Obligations are Imposed on Covered Investment Advisers?

Generally, the NPRM would require Covered Investment Advisers to take the following steps:

  1. Establish and maintain AML/CFT programs[5] with respect to all advisory activities[6] (except those undertaken with respect to mutual funds[7]), with risk-based procedures for conducting ongoing customer due diligence (CDD), which would be made available for inspection by FinCEN or the Securities and Exchange Commission (SEC);
  2. Comply with certain reporting requirements, including the requirement to file Suspicious Activity Reports and Currency Transaction Reports with FinCEN, replacing the current Form 8300 requirement;
  3. Meet certain recordkeeping requirements, including to comply with the Recordkeeping and Travel Rule; and
  4. Fulfill other obligations under the BSA and FinCEN’s implementing regulations.

FinCEN proposes to delegate examination authority for investment advisor compliance with the BSA to the SEC.

While the NPRM does not propose including Customer Identification Program or beneficial ownership identification requirements, FinCEN expects to address both in future rulemakings.

The Bigger Picture

As noted above, AML/CFT requirements among investment advisers currently vary. The NPRM proposes not only to strengthen the U.S. financial system by combating illicit activity, but also promises to level the regulatory playing field by preventing bad actors from shopping around to find the adviser with the laxest AML/CFT safeguards. It is further intended to bring the U.S. into alignment with international financial standards. This has been a key focus of U.S. government activity in the AML/CFT space recently, most notably in connection with the Corporate Transparency Act.

While the NPRM would impose new requirements on Covered Investment Advisers, FinCEN intends to minimize burdens and avoid redundancies. For example, for advisers that may already be subject to AML/CFT requirements, the new rule would not require any additional burdens, assuming the existing program meets BSA standards.

That said, FinCEN estimates that implementing an AML/CFT program would take about 120 hours of work, and the annualized cost burden for small investment advisers[8] would be approximately $48,000 for the first year, and $40,000 for subsequent years. This could add significant costs to the bottom lines of these small investment advisers. We also note that the requirement to conduct ongoing CDD may be particularly onerous. And while some of these services may be outsourced to third parties, liability remains with the investment adviser, who would still be required to identify and document the procedures implemented by such third parties, and to take reasonable steps to assess whether the service provider carries out the procedures effectively.

The NPRM includes a number of questions posed for comment, including whether ERAs should be excluded from the proposed definition of investment adviser, whether new reporting requirements create redundancies for entities already collecting required information, what existing policies and procedures may be relied on by investment advisers to comply with the rule, how sub-advisory activities should be addressed, and others. Public comments will be helpful in aligning the rule with industry standards and balancing U.S. economy safeguards while avoiding unwieldy burdens on entities – particularly on smaller, low-risk entities that may already be subject to AML/CFT obligations. Covered Investment Advisers would have 12 months from the final rule’s effective date to come into compliance. Comments on the NPRM will be accepted until April 15, 2024, and FinCEN strongly encourages the public to share their thoughts.

[1] Generally, this would have included private funds, commodity pools, and companies that invest primarily in real estate and/or interests therein.

[2] This would have generally included RIAs and certain advisers exempt from registration under the now repealed “Private Adviser Exemption,” pursuant to Section 203(b)(3) of the Investment Advisers Act of 1940, as amended.

[3] In general, this would have solely included RIAs.

[4] While FinCEN has not expressly discussed whether or not state exempt reporting advisers would be subject to the NPRM, it is likely that these persons would not since FinCEN concluded that state-registered advisers posed minimal risk in comparison to RIAs and ERAs, and it is likely they have only lumped state exempt reporting advisers in that same category.

[5] An AML program necessarily requires significant resources, including appointing a knowledgeable compliance officer to oversee the program, ongoing training, and independent testing of the program.

[6] FinCEN provides a non-exclusive list of what advisory activities would include, e.g., the management of customer assets, the provision of financial advice, and the execution of transactions for customers. Excluded activities might include those undertaken in connection with making managerial/operational decisions about portfolio companies.

[7] The NPRM excludes mutual funds, which are currently classified as financial institutions under the BSA and are already subject to BSA requirements.

[8] According the NPRM, “small advisers are those managing less than $25 million in customer assets.”

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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