Bottom Line: Biden Administration May Revive FinCEN’s Proposed Rule For Investment Advisers

Unlike broker-dealers, investment advisers are not currently required to maintain anti-money laundering (“AML”)/counter-terrorist financing (“CTF”) compliance programs under the Bank Secrecy Act (“BSA”), or file Suspicious Activity Reports (“SARs”).  In 2015, during President Obama’s second term, the Financial Crimes Enforcement Network (“FinCEN”) proposed exactly such a rule for certain investment advisers.  Although FinCEN then never moved forward, the stars may be aligning for the implementation of a similar rule in the new Biden Administration.

Industry watchdog groups will push for this.  For example, after Biden’s victory in the 2020 election, the independent Financial Accountability & Corporate Transparency Coalition wrote a memorandum, asking him to “[f]inalize the proposed Obama-era rule requiring investment advisers to establish AML programs.”  Action on this front also would be generally consistent with the 2020 Examination Priorities issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE), which stated that the OCIE will prioritize examining broker-dealers “for compliance with their AML obligations in order to assess, among other things, whether firms have established appropriate customer identification programs and whether they are satisfying their SAR filing obligations, conducting due diligence on customers, complying with beneficial ownership requirements, and conducting robust and timely independent tests of their AML programs.”  Moreover, the FBI’s concern over money laundering through private equity and hedge funds may increase the likelihood of the administration reviving some version of the 2015 proposed rule.  A leaked FBI Intelligence Bulletin from May 2020 stated that “threat actors[, or money launderers,] likely use the private placement of funds, including investments offered by hedge funds and private equity firms, to launder money, circumventing traditional” AML protections in place at other financial institutions already subject to such regulations.  According to its Intelligence Bulletin, the FBI made this assessment in “high confidence.”

FinCEN’s 2015 proposed rule expressed a similar concern regarding perceived loopholes in the overall BSA/AML compliance regime, stating that it sought to regulate investment advisers who may be at risk for attempts by money launderers “seeking access to the U.S. financial system” through financial institutions that are not required to establish AML procedures or file SARs.  Key provisions of FinCEN’s 2015 proposed rule included:

• Certain investment advisers would have been required to develop and implement written AML compliance programs reasonably designed to prevent investment advisers from being used to facilitate money laundering. The program would be risk-based, which was intended to give investment advisers flexibility to create their own programs to meet the risks posed by the specific services they provide.
• FinCEN’s proposed definition of an “investment adviser” covered by the rule was “[a]ny person who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80v-3(a).” Under this proposed definition, investment advisers who manage $100 million or more in regulatory assets would be included.  On the other hand, investment advisers who manage less than $100 million in regulatory assets would be exempt from the definition.
• The rule delegated FinCEN’s authority to examine investment advisers for AML compliance to the SEC.
• The rule did not propose a customer identification program (“CIP”) requirement for investment advisers. FinCEN stated that it anticipated addressing that issue in later rules.

The 2015 proposed rule generally mirrored the current AML program requirements for broker-dealers.  For example, both rules require AML programs to include policies, procedures, and internal controls reasonably designed to achieve compliance with the BSA and its implementing rules.  Likewise, the 2015 proposed rule would impose a SAR filing requirement “that is uniform with that for other financial institutions,” including broker-dealers.  Notably, while broker-dealers must enact CIP, the 2015 proposed does not require investment advisers to do so.

The 2015 proposed rule was not the first time FinCEN tried to require investment firms to establish AML programs.  FinCEN proposed a rule on September 26, 2002 that would have required unregistered investment companies to implement AML programs.  Similarly, on May 5, 2003, FinCEN proposed another rule that would have required hedge funds and private equity funds to create AML programs.  In June 2007, FinCEN decided to reexamine the implementation of its regulations to ensure they were being applied effectively.  This initiative halted enactment of the 2002 and 2003 rules, both of which FinCEN withdrew on November 4, 2008.

Industry Reaction

Not surprisingly, investment advisers historically have opposed the full breadth of FinCEN’s proposed 2015 rule.  In a comment to FinCEN’s proposed 2015 rule, the Private Equity Growth Capital Council (“PEGCC”), while generally supporting the 2015 proposed rule, expressed that certain investment vehicles and investment advisors should be excluded from it.  Particularly, PEGCC wrote that private equity funds and the investment advisers who manage them should be exempt from the 2015 proposed rule because those funds lack liquidity that make other financial institutions attractive to money launderers.  PEGCC also explained that FinCEN originally excluded these funds from AML requirements in its 2002 and 2003 proposed rules, but the 2015 proposed rule lacks a similar exclusion.  In addition to private equity funds, PEGCC argued that the 2015 proposed rule should exclude any “investment fund that, in the ordinary course, restricts its investors from redeeming any portion of their ownership interests in the fund within two years after that interest was initially purchased.”

To be sure, the Biden Administration has not indicated its intention to revive FinCEN’s 2015 proposed rule.  Further, FinCEN already will have its hands full throughout 2021 with issuing the many implementing regulations required under the new and broad AMLA.  While the timeline is uncertain, investment advisers should prepare for the possibility of having to develop and implement their own AML compliance programs under the Biden Administration.  Although many investment advisers already have voluntary AML compliance programs in place, actual regulations will force them to adjust and almost certainly expand their programs.