The Treasury Department’s Financial Crimes Enforcement
Network (FinCEN) proposed a rule to extend its authority under the Bank Secrecy
Act (BSA) to cover certain investment advisors. Regulators published a fact
sheet about the proposal and a Treasury report assessing the types of risks
posed by certain investment advisors.
In a Notice of Proposed Rulemaking (NPRM), FinCEN explained
its goal is to identify and stop criminals, foreign and domestic, who use
anonymous entities and all-cash real estate transactions to exploit the U.S.
financial system for illicit financial gains, according to a press release. The
proposal would increase transparency in investment transactions and help law
enforcement identify illicit proceeds entering the U.S. economy.
FinCEN Director Andrea Gacki stressed the significance of
investment advisers as crucial guardians of the American economy, warranting
heightened regulatory scrutiny.
“The current patchwork of AML/CFT requirements creates
regulatory gaps that criminals and foreign adversaries exploit to launder
money, hide illicit wealth, and compromise American innovation,” Gacki said in
the release. “This proposed rule would level the regulatory playing field,
protect U.S. economic and national security, and safeguard American
businesses.”
Certain investment advisers would have to adhere to
Anti-Money Laundering (AML) requirements and Countering the Financing of
Terrorism (CFT) requirements defined under the BSA. This would include
implementing risk-based programs, submitting suspicious activity reports (SARs)
to FinCEN, and maintaining appropriate recordkeeping practices. Under current
law, investment advisors have the discretion to decide whether to voluntarily
follow AML/CFT standards.
FinCEN’s risk assessment underscores the vulnerabilities in
the financial sector, emphasizing the need for inconsistency in applying
AML/CFT standards to legitimate and illicit investors, the agency asserted.
Regulators recommend companies implement AML/CFT tools,
which can:
·
Expose the infrastructure of criminal
organizations, corruption and conspiracies to commit terror acts;
·
Provide authorities with roadmaps to those who
facilitate criminal and illicit activities;
·
Lead to the recovery and forfeiture of assets
obtained illegally; and
·
Support broad and effective efforts to deter a
wide range of criminal activities, including the financing of terrorism.
The proposal would build upon the 2021 U.S. Strategy on
Countering Corruption, reflecting a tailored approach to mitigating risks posed
by the investment advisory industry. The rule also would reexamine a 2015 NPRM that
similarly proposed to extend AML/CFT requirements to certain investment
advisors.
The Treasury’s 2024 Investment Advisor Risk Assessment report
describes the potential negative impact of vulnerabilities the proposal seeks
to address.
“While investment advisers are generally not subject to any
comprehensive AML/CFT requirements, they may in some instances carry out
certain AML/CFT functions, such as CIP (customer identification program), CDD (customer
due diligence), and SAR (suspicious activity report) filing,” the report
states. “Some investment advisers may perform certain AML/CFT functions if the
entity is also a registered broker-dealer (i.e., a dual registrant), is a bank,
or is an operating subsidiary of a bank; other investment advisers are
affiliates of banks or broker-dealers, which may implement an enterprise-wide
AML/CFT program that would include that investment adviser. An investment
adviser may also perform AML/CFT functions via contract with a broker-dealer
(e.g., CIP for joint customers) or other financial institution, such as when
the adviser advises an open-end registered investment company (e.g., mutual
fund).
“Outside of these circumstances, some RIAs [registered
investment advisers] have voluntarily implemented certain AML/CFT measures,
such as due diligence or identification requirements. However, these voluntary programs give RIAs
wide discretion in what information to request and are not subject to any
regulations under the BSA. Further, to the extent these RIAs do not integrate
comprehensive AML/CFT program requirements into their broader compliance
programs, they may lack familiarity with and understanding of the goals and
objectives of the AML/CFT regime.”
Accompanying the proposal is a fact sheet in which FinCEN explains
the criteria for determining which investment advisers would be covered by the rule
and what requirements it would impose. Covered advisors would be included in the
BSA’s definition of “financial institution.”
Investment advisers would be considered financial
institutions under the BSA if they are registered with the Securities and
Exchange Commission (SEC) and report to the SEC as exempt reporting advisers
(ERAs). Advisors registered with the SEC are also known as registered
investment advisers (RIAs).
Investment advisers are generally required to register with
the SEC if they have more than $110 million in assets under management (AUM).
ERAs are investment advisers that (1) advise only private funds and have less
than $150 million in AUM in the U.S. or (2) advise only venture capital funds.
ERAs are exempt from SEC registration but are still required to file certain
information with the agency.
The proposed rule would require RIAs and ERAs to:
·
implement an AML/CFT program;
·
file certain reports, such as SARs, with FinCEN;
·
keep records such as those relating to the
transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule); and
·
fulfill other obligations applicable to
financial institutions subject to the BSA and FinCEN’s implementing
regulations.
The fact sheet notes that FinCEN tailored the proposed
requirements to minimize potential business burdens and not pile on additional
or redundant requirements for investment advisers. Given that investment
advisers provide services to open-end investment companies, such as mutual
funds, which the BSA already defines as “financial institutions,” and because
of the regulatory and practical relationship between mutual funds and their
investment advisers, the proposed rule would not require investment advisers to
apply AML/CFT program or SAR filing requirements to mutual funds they advise.
FinCEN is proposing to delegate its examination authority to
the SEC, as it is the federal functional regulator responsible for overseeing
and regulating investment advisers. 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.
FinCEN encourages interested parties to provide feedback on
the proposed rule for consideration no later than April 15.