AML Obligations May Be Coming for Investment Advisers

Yesterday, the Financial Crimes Enforcement Network (FinCEN) published a proposal in the Federal Register to enact a federal standard for anti-money laundering (AML) and combatting the financing of terrorism (CFT) programs on U.S. Securities and Exchange Commission (SEC)-registered investment advisers (RIAs) as well as exempt reporting advisers (ERAs).

A recent study by the Treasury Department found that during a nine-year period, more than 15% of RIAs and ERAs were associated with or were referenced in at least one Suspicious Activity Report (SAR). This proposal represents the latest attempt to enact AML and CFT obligations on investment advisers.

Since the prior proposal in 2015, the landscape has continued to evolve. The 2016 enactment of the FinCEN Customer Due Diligence Rule (CDD Rule) and the 2024 enactment of the Corporate Transparency Act demonstrate FinCEN’s commitment to creating a comprehensive regulatory structure for financial institutions to combat financial crime. This most recent proposal would require investment advisers to maintain AML programs, significantly enhance the breadth of FinCEN’s coverage, and somewhat harmonize the requirements for investment advisers with those that are imposed on banks and broker-dealers.

Proposed rule requirements

The proposed rule would require investment advisers to:

• Implement an AML/CFT program, which would include:
  • The development of reasonably designed and risk-based policies, procedures, and internal controls
  • The designation of an AML/CFT compliance officer
  • An ongoing employee training program
  • An independent testing function to test the program
• File certain reports, such as SARs, with FinCEN
• Keep records such as those relating to the transmittal of funds, including compliance with FinCEN’s Recordkeeping and Travel rules
• Fulfill other obligations applicable to financial institutions subject to the Bank Secrecy Act and FinCEN’s implementing regulations

Because AML/CFT obligations are already imposed on mutual funds, FinCEN’s newly proposed rule would not impose new obligations on RIAs with respect to their management of mutual funds. The proposal also excludes any requirements for Customer Identification Programs (CIPs) and the collection of beneficial ownership information for legal entities. The proposal, however, does incorporate other components of the CDD rule that require understanding the purpose of customer relationships and conducting ongoing monitoring. FinCEN stated it plans to impose new CIP, beneficial owner, and CDD requirements through subsequent rulemaking.

Proposed oversight framework

Given the SEC’s expertise in examining RIAs and ERAs, FinCEN has proposed that the SEC would be responsible for examining firms for compliance with the newly proposed rules. Such an approach prevents RIAs and ERAs from being examined by a new regulator, but would expand the scope of SEC examinations.

Our guidance

FinCEN is proposing to bring investment advisers into the prevailing framework governing AML and financial crime compliance programs. While the investment advisory industry has been able to avoid the enactment of such regulations in the past, yesterday’s proposal shows that it would be prudent for investment advisers to begin preparing for such requirements.

How we help

ACA’s AML and Financial Crimes practice offers advisory services and solutions to assist financial services firms in addressing threats and regulatory obligations associated with financial crime. We work with investment advisers and broker-dealers, among others, to assess risk, develop policies and procedures, and perform independent tests and gap analyses. Our support can incorporate our ComplianceAlpha^® regulatory technology and managed services to help your firm meet its data screening, ongoing monitoring, remediation and reporting needs.

Reach out to your ACA consultant, or contact us to find out how ACA can help you meet your AML requirements. 

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