Proposed Rule to Impose Anti-Money Laundering Requirements on Investment Advisers

K2 Integrity

On 13 February 2024, the Financial Crimes Enforcement Network (FinCEN) issued a groundbreaking Notice of Proposed Rulemaking (NPRM) to combat illicit finance and national security threats in the investment adviser sector. The proposed rule would subject certain investment advisers to anti-money laundering and countering the financing of terrorism (AML/CFT) requirements pursuant to the Bank Secrecy Act (BSA), including requirements to maintain AML/CFT programs, report suspicious activity to FinCEN, and fulfill BSA recordkeeping requirements. FinCEN’s proposed rule also announced plans for at least two subsequent rulemakings that would require covered investment advisers to apply customer identification program (CIP) requirements and to collect and verify beneficial ownership information for legal entity customers, respectively, in line with other covered financial institutions.

This Policy Alert discusses the background and context for FinCEN’s proposed rule, the new requirements that would apply to investment advisors, additional measures that are likely to follow in the months to come, and key implications for the investment adviser sector. As discussed below, firms will have until 15 April 2024 to submit written comments on the NPRM to FinCEN. Although the process to finalize the proposed rule based on public comments can take several months, given both the breadth of the anticipated obligations and the need to accommodate extended budgetary cycles at impacted firms it is important for investment advisors to begin planning immediately to ensure that effective systems and processes are in place to meet new AML/CFT requirements when the final rule goes live.[1]

Background and Prior Rulemakings

FinCEN’s proposed rule is designed to address the risk of sanctioned individuals, corrupt officials, tax evaders, and other criminal actors abusing investment advisers (IAs) to invest in U.S. securities, real estate, and other assets, including companies developing critical infrastructure or sensitive technologies. Global standard setters such as the Financial Action Task Force (FATF) have long pointed to the lack of uniform and comprehensive AML/CFT regulations for the IA sector as a key deficiency in the U.S. AML/CFT regime[2]—a view reinforced by the White House’s 2021 Strategy on Countering Corruption,[3] the 2024 National Money Laundering Risk Assessment,[4] and a first-of-its-kind Investment Adviser Risk Assessment published by the U.S. Department of the Treasury in tandem with FinCEN’s proposed investment adviser rule.[5]

FinCEN has previously proposed AML regulations for investment advisers, publishing an NPRM for unregistered IAs in 2002 and an NPRM for certain investment advisers in 2003. In 2007, FinCEN announced that it was undertaking a review of its broader AML regulatory framework and, following this initiative, in 2008 FinCEN formally withdrew both proposed rules. A new NPRM that would have subjected certain IAs to AML program requirements and required such IAs to report suspicious activity to FinCEN was published in 2015; however, FinCEN has not issued a final rule based on this NPRM to date and, as part of the 2024 NPRM, announced the formal withdrawal of the 2015 NPRM.

IA sector participants may therefore wonder why—after more than 20 years of proposed rulemakings that have yet to result in a final rule—this time would be any different. Yet the new NPRM and accompanying Investment Adviser Risk Assessment highlight several reasons to expect the current proposal to have the staying power previous proposals have lacked:

  • Since 2015, the IA sector has seen substantial growth and expansion into new products and services, with registered investment advisers (RIAs) reporting a near-doubling in assets under management (AUM) between 2015 and 2023.[6]
  • The number of hedge funds, private equity funds, and venture capital funds advised by IAs has increased dramatically in the last five years alone, as private funds have assumed an increasingly important role in the financial system. There are now approximately 5,500 RIAs that advise more than $20 trillion in private fund AUM.[7]
  • Since 2015, as evidenced by the Investment Advisers Risk Assessment noted above, the U.S. government has developed a more detailed understanding of the illicit finance risks associated with the U.S. IA industry, including schemes perpetrated by sophisticated criminal networks, Russian oligarchs, and U.S. strategic competitors.[8] For example:
    • Treasury analysis of suspicious activity reports (SARs) filed between 2013 and 2021 found that 15.4 percent of IAs that would be covered by the proposed rule were associated with or referenced in at least one SAR during this time.[9]
    • Further, the number of SAR filings associates with IAs increased by approximately 400 percent over the same period—much higher than the overall increase in SAR filings, which was approximately 140 percent. [10]

For these reasons, and given direct public statements from senior U.S. government officials in support of the proposed rule,[11] K2 Integrity expects FinCEN to proceed to a final rule based on the current NPRM, subject to modifications resulting from the ongoing notice-and-comment period. Written comments on the NPRM must be submitted no later than 15 April 2024.

The Proposed Rule

The investment adviser industry spans a wide range of entities that provide a variety of financial services to retail investors, high-net-worth individuals, private institutions, and governmental entities, including local, state, and foreign government funds. Advisers typically provide ongoing advice about buying, selling, or holding investments and monitor the performance of clients’ investments and their alignment with clients’ overall investment objectives. Many clients grant the adviser the power to manage assets on a discretionary basis, meaning the adviser has the authority to decide which securities to purchase and sell for the client.

As critical gatekeepers to the U.S. financial system, IAs are at risk of abuse by money launderers, corrupt officials, and other bad actors. Specifically, the U.S. Treasury’s Investment Adviser Risk Assessment finds that certain IAs:

  • Have served as an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, and tax evasion;
  • Manage billions of dollars ultimately controlled by sanctioned persons and their associates, including but not limited to Russian political and economic elites;
  • Are being used by foreign states, most notably the People’s Republic of China and Russia, to access certain technology and services with long-term national security implications through investments in early-stage companies; and
  • Have defrauded clients and stolen their funds.

To address these identified threats, close longstanding gaps U.S. AML/CFT framework, and advance the U.S. Strategy on Countering Corruption, FinCEN is proposing a rule that would bring thousands of IAs within its regulatory perimeter by requiring certain IAs to apply AML/CFT requirements pursuant to the BSA, including by implementing risk-based AML/CFT programs, reporting suspicious activity to FinCEN, and fulfilling recordkeeping requirements.

The proposed rule would include the following IAs in the definition of a “covered financial institution” under the BSA:

  • Investment advisers registered with the Securities and Exchange Commission (SEC), also known as registered investment advisers (RIAs);[12] and
  • Investment advisers that report to the SEC as exempt reporting advisers (ERAs), such as certain private fund and venture capital advisers.[13]

RIAs and ERAs advising mutual funds are excluded from the scope of this proposed rule because mutual funds are already defined as covered financial institutions under the BSA.

By including IAs in the definition of covered financial institutions, the proposed rule would require RIAs and ERAs to:

  • Implement a reasonably designed risk-based AML/CFT program, to include risk-based procedures for conducting ongoing customer due diligence (CDD);
  • File certain reports, specifically:
    • SARs instead of current Form 8300 for suspicious activities; and
    • Currency Transaction Reports (CTRs) instead of current Form 8300 for receipt of more than $10,000 in currency and certain negotiable instruments;
  • Keep records such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rules);
  • Apply information-sharing provisions between and among FinCEN, law enforcement, government agencies, and certain financial institutions (i.e., sections 314(a) and 314(b) of the USA PATRIOT Act);
  • Fulfill other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations, Including special due diligence requirements for correspondent and private banking accounts and special measures under section 311 of the USA PATRIOT Act.

Defining investment advisers as “covered financial institutions” would ordinarily place IAs within the scope of requirements for the collection and verification of beneficial ownership information of legal entity customers, as set forth in FinCEN’s CDD Rule. However, the proposed rule expressly provides that an IA would not be considered a “covered financial institution” for the purposes of the CDD Rule, given that the requirement to identify and verify the beneficial owners of legal entity customers is predicated on the existence of a CIP requirement, which under the BSA must be prescribed jointly with the relevant federal functional regulator (in this case, the SEC). FinCEN has therefore announced its intention to address CIP requirements through a future joint rulemaking with the SEC and to address the requirement to collect and verify beneficial ownership information for legal entity customers through a separate future rulemaking.[14]

Although FinCEN has overall authority for enforcement of compliance with the BSA and its implementing regulations, it may delegate examination authority to appropriate agencies while retaining authority for the coordination and direction of procedures and activities of these agencies. Accordingly, FinCEN is proposing to delegate its examination authority to the SEC, the federal functional regulator currently responsible for the oversight and regulation of certain IAs. The proposed delegation would be consistent with FinCEN’s existing delegation to the SEC of the authority to examine brokers and dealers in securities and mutual funds for compliance with the BSA and FinCEN’s implementing regulations.[15]

Finally, the proposed rule noted that it will continue to monitor activity involving state-registered IAs for indicia of money laundering, terrorist financing, or other illicit finance activities, indicating that FinCEN may take additional measures to mitigate the risks associated with state-registered IAs at a future date.

Key Implications and Next Steps

FinCEN’s proposed rule for IAs marks the culmination of a multiyear, interagency effort by the U.S. government to understand, assess, and mitigate the illicit finance risks facing the IA industry. Given the rapid growth of the sector and its acute vulnerabilities to key national security threats—including sanctions evasion by Russian elites and abuse by U.S. strategic competitors—there is intensifying pressure on and commitment by U.S. government stakeholders to close longstanding gaps in the U.S. AML/CFT framework with respect to IAs. The proposed rule would provide highly useful information to law enforcement authorities and national security agencies, safeguard the IA sector against illicit activity, and make it easier for U.S. IAs and U.S. government agencies alike to identify attempts by foreign adversaries to invest in early-stage companies with ties to sensitive technologies.

With the proposed rule likely to advance to the final rulemaking stage following the ongoing public comment period, IAs covered by the NPRM should:

  • Provide written comments to FinCEN by 15 April 2024 addressing the proposed definition of “investment adviser” and the scope and content of proposed AML requirements (see especially the questions posed in section V of the NPRM);
  • Undertake an enterprise-wide illicit finance risk assessment that considers, among other factors, the types of accounts offered, the types of customers opening such accounts, the geographic location of such customers, and the sources of wealth for customer assets;
  • Begin adapting existing policies, procedures, and internal controls to ensure they are aligned to the firm’s illicit finance risk profile and risk appetite and to incorporate anticipated AML/CFT obligations, such as CTR and SAR filing requirements;
  • Identify a person or persons to be responsible for implementing and monitoring the operations and internal controls of the AML/CFT program once it is operational;
  • Design and document a system or process, if one does not already exist, for conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information;
  • Consider, either categorically or on a risk basis, voluntarily collecting and verifying customer and beneficial ownership information to support effective ongoing CDD monitoring, suspicious transaction reporting, and Office of Foreign Assets Control (OFAC) sanctions compliance;
  • Provide for independent testing of the AML/CFT compliance program by the adviser’s personnel or a qualified outside party;
  • Develop and deliver ongoing training to employees on AML/CFT risks and requirements relevant to their functions; and
  • Prepare to implement special due diligence requirements for private banking and correspondent bank accounts involving foreign persons, including to address relationships with high-net-worth non-U.S. customers and foreign financial institutions that may be acting on behalf of higher-risk non-U.S. customers.

Investment advisers should be aware that the process for reviewing and incorporating public comments is likely to take several months following the close of public comments on 15 April 2024. During this period, FinCEN will analyze all comments received, draft a written description of how comments were considered and any resulting modifications to the proposed rule for inclusion in the published final rule, and revise, as necessary, the regulatory impact analysis presented in the NPRM. Although FinCEN is seeking comment on various details regarding the scope of the proposed rule and the anticipated burdens and costs of compliance with its proposed requirements, IAs should expect the fundamental elements of the NPRM—including the requirements to maintain an AML/CFT program, to file SARs and CTRs instead of Form 8300, and to fulfill BSA recordkeeping requirements—to remain unchanged as it proceeds to the final rulemaking stage.

[1] Under the proposed rule, an investment adviser would be required to develop and implement an AML/CFT program within 12 months of the effective date of the final rule.

[2] FATF, United States Fourth Round Mutual Evaluation Report (December 2016), p. 41, available at:

[3] United States Strategy on Countering Corruption (December 2021), pp. 22-23, available at:

[4] U.S. Department of the Treasury, 2024 National Money Laundering Risk Assessment (February 2024), pp. 86-88, available at:

[5] U.S. Department of the Treasury, 2024 Investment Adviser Risk Assessment (February 2024), available at:

[6] Federal Register, Vol. 89, No. 32 (15 February 2024), p. 12116, available at:

[7] Federal Register, Vol. 89, No. 32 (15 February 2024), p. 12116, available at:

[8] Federal Register, Vol. 89, No. 32 (15 February 2024), p. 12116, available at:

[9] U.S. Department of the Treasury, 2024 Investment Adviser Risk Assessment (February 2024), p. 16, available at:

[10] U.S. Department of the Treasury, 2024 Investment Adviser Risk Assessment (February 2024), p. 16, available at:

[11] See, e.g., the Atlantic Council, “Under Secretary Brian Nelson on Key Reforms to Curb Dirty Money Flows in the US,” 15 February 2024, available at:

[12] Investment advisers generally must register with the SEC if they have over $110 million in AUM. As of 31 July 2023, there were 15,391 RIAs reporting approximately $125 trillion in AUM for their clients.

[13] ERAs are investment advisers that (1) advise only private funds and have less than $150 million in AUM in the United States or (2) advise only venture capital funds. ERAs are exempt from SEC registration but still must file certain information with the SEC. As of 31 July 2023, there were 5,846 ERAs that were exempt from registering with the SEC but filed certain information with SEC.

[14] Independent of the investment adviser NPRM, FinCEN intends to amend the CDD Rule to bring it into alignment with the Corporate Transparency Act of 2021.

[15] 31 CFR 1010.810(b)(6).

Written by:

K2 Integrity

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