On August 28, 2024, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued two final rules.
The Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers Rule newly applies anti-money laundering/countering the financing of terrorism (AML/CFT) requirements to certain investment advisers that are registered with the Securities and Exchange Commission (SEC) and investment advisers that report to the SEC as exempt reporters. The Investment Adviser Rule was published in the Federal Register on September 4, 2024 and will become effective January 1, 2026.
The Anti-Money Laundering Regulations for Residential Real Estate Transfers Rule will require certain industry professionals to report information to FinCEN about non-financed transfers of residential real estate to legal entities or trusts that present high illicit finance risk and will become effective December 1, 2025.
After numerous failed attempts to pass similar regulations reaching back as far as 2003, the adoption of these rules marks the most significant change to the AML/CFT regulations in decades. According to Treasury Secretary Janet Yellen, “these two rules … close critical loopholes in the U.S. financial system that bad actors use to facilitate serious crimes.” In its press release, FinCEN framed the promulgation of these rules as part of an ongoing effort to combat “illicit finance” and protect U.S. national security.
The Investment Adviser Rule
In February 2024, the U.S. Treasury Department published its 2024 investment adviser risk assessment, focusing on the lack of comprehensive and uniform AML/CFT obligations within the investment adviser industry. Historically, investment advisers have not been included in the laundry list definition of “financial institution” under the Bank Secrecy Act (BSA) or its implementing regulations. As a result, investment advisers have not been required to maintain an AML/CFT program, file suspicious activity reports (SAR), or conduct customer due diligence (CDD) (including implementing a customer identification program (CIP)). According to the Treasury Department, these gaps in uniformity lead to the exploitation of the investment advisory sector by illicit actors and deprive law enforcement, regulators, and other authorities of useful information.
In an attempt to mitigate the illicit finance risks highlighted in the 2024 risk assessment, the Investment Adviser Rule:
- Brings certain investment advisers within the scope of financial institutions that are required to comply with a variety of AML/CFT requirements.
- Covered investment advisers under the new rule include certain registered investment advisers (RIAs), exempt reporting advisers (ERAs), dual registrants (RIAs that are also registered broker-dealers, banks, or bank subsidiaries), and foreign-located investment advisers that are registered or are required to register with the SEC.
- The term “investment adviser” will not include state registered advisers, foreign private advisers, family offices, or RIAs that are registered with the SEC solely as a mid-sized adviser, multistate adviser, pension consultant, or adviser that does not report any AUM on a Form ADV.
- Requires covered investment advisers to develop and implement a written risk-based and reasonably designed AML/CFT program that:
- Implements internal policies, procedures, and controls reasonably designed to prevent money laundering, terrorist financing, or other illicit finance activities.
- Provides for independent testing of the AML/CFT program on a risk-based schedule.
- Designates an employee of the investment adviser (or an affiliate) to be responsible for implementing and monitoring the operations and internal controls of the AML/CFT program.
- Provides ongoing AML/CFT employee training.
- Implements appropriate risk-based procedures for conducting ongoing CDD similar to existing obligations for CIP obligations for banks, which must include:
- Identifying and verifying the identity of the customer.
- Identifying and verifying the identity of the beneficial owners of legal entity customers opening accounts.
- Understanding the nature and purpose of customer relationships to develop a customer risk profile.
- Conducting ongoing monitoring to identify and report suspicious transactions and maintain and update customer information.
- Has been approved in writing by a board of directors or similar governing body.
- Permits covered investment advisers to contractually delegate the implementation and operation of the investment adviser’s AML/CFT program so long as the investment adviser remains responsible for program compliance and ensures FinCEN and the SEC are able to obtain relevant information and records relating to the AML/CFT program.
- Requires covered investment advisers to file SARs within 30 days for any suspicious transaction conducted by, at, or through the investment adviser if the adviser knows, suspects, or has reason to suspect that a transaction:
- Involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity.
- Is designed, whether through structuring or other means, to evade BSA requirements.
- Has no business or apparent lawful purpose and the investment adviser knows of no reasonable explanation for the transaction after examining the available facts.
- Involves the use of the investment adviser to facilitate criminal activity.
Examples of suspicious activity that would require an SAR may include:
- Transactions designed to hide the source or destination of funds.
- Fraudulent activity.
- Investors in private funds requesting access to detailed nonpublic technical information about a portfolio company that is inconsistent with a professed focus on economic return.
- Unusual wire activity that does not correlate with a customer’s stated investment objectives.
- Transferring funds or other assets involving third-party accounts with no plausible relationship to the customer.
- Transfers of funds or assets involving suspicious counterparties.
- Unusual withdrawal requests by customers with ties to activity or individuals subject to U.S. sanctions following or shortly before news of a potential sanction listing.
- Transactions involving potential fraud and manipulation of customer funds directly by the investment adviser (such as insider trading, market manipulation, or unusual wire transfer requests by an investment adviser from a private fund’s account held for the fund’s benefit at a qualified custodian).
- Imposes recordkeeping and “travel rule” compliance obligations that require covered investment advisers to create and retain records for extensions of credit and cross-border transfers of currency, monetary instruments, checks, investment securities, and credit exceeding $3,000.
- Requires covered investment advisers to report transactions in currency over $10,000 on currency transaction reports (CTRs) rather than Form 8300.
- Requires covered investment advisers to apply an AML/CFT program to “all advisory services” (e.g., the management of customer assets and the submission of customer transactions for execution) provided to all customers other than mutual funds that have AML/CFT programs in compliance with the preexisting AML/CFT program requirements that apply to mutual funds, bank- and trust-company-sponsored collective investment funds, and other investment advisers subject to the Investment Adviser Rule.
- Confirms that dual registrants are not required to establish multiple or separate AML/CFT programs so long as a comprehensive AML/CFT program covers all the dual registrant’s applicable legal and regulatory obligations.
- Amends FinCEN’s information sharing, special due diligence, and special measures procedures to expressly bring covered investment advisers within the scope of such procedures, thereby imposing obligations on these covered investment advisers to provide certain information upon request by FinCEN while also allowing them to access confidential information from other financial institutions through 314(b) programs.
- Delegates FinCEN’s examination authority over covered investment advisers to the SEC but does not delineate any specific examination guidelines. According to the final rule, FinCEN anticipates the SEC’s review of compliance with the Investment Adviser Rule by incorporating its requirements into the SEC’s risk-based examination program.
Comments and Key Takeaways
When FinCEN published the proposed rule on this topic, many investment adviser groups stood in stark opposition – a sentiment that was clearly reflected in comments submitted in connection with the proposed rule. In response to comments received, FinCEN made several adjustments to the Investment Adviser Rule before adopting it in final form; however, the overall response to the final rule has been mixed. While some stakeholders were encouraged by FinCEN’s responsiveness to at least some comments, groups representing investment advisers maintain that the rule still presents several issues.
For example, in its official statement, the Investment Adviser Association believes the Investment Adviser Rule is “too prescriptive in certain of its specific requirements, which will make it more difficult for advisers to tailor their programs accordingly” and that it “will also impose undue burdens on smaller firms.”
Ultimately, the final rule imposes a litany of new rules and requirements, each with specific nuances. While many larger investment advisers already have AML/CFT programs in place as a best practice and to comply with contractual obligations, the final rule is likely to impose a heavy burden on smaller firms. For covered investment advisers that have not voluntarily implemented AML/CFT programs or those that are not associated with a bank or broker-dealer, these new compliance obligations will require significant time and attention. Investment advisers that have voluntarily implemented AML/CFT programs or have such programs in place as a result of a bank or broker-dealer relationship should carefully evaluate the sufficiency of the program to prepare for regulatory scrutiny.
As investment advisers prepare for the Investment Adviser Rule to take effect, covered investment advisers should:
- Consider whether they are adequately resourced to run a comprehensive AML/CFT program in house or if they should enlist a third-party administrator.
- Review existing third-party administration agreements to (1) ensure the functions the administrator has agreed to perform are in compliance with the Investment Adviser Rule; and (2) confirm the investment adviser’s ability to sufficiently oversee compliance and respond to recordkeeping and information requests.
- Review existing or develop and implement new AML/CFT program policies and procedures.
- Prepare a written response in anticipation of pushback from legal entity investors that do not wish to share beneficial ownership information.
- Develop and implement SAR and CTR monitoring and filing policies and procedures.
- Incorporate AML/CFT compliance into annual reviews in anticipation of SEC examinations in connection with the Investment Adviser Rule.
- Consider potential costs associated with implementation and maintenance of a comprehensive AML/CFT program.
Alston & Bird is well-equipped to help clients navigate this new regulatory landscape. Our team of experienced regulatory attorneys can help covered investment advisers develop, implement, and review AML/CFT programs, and our team is prepared to provide guidance and support as covered investment advisers prepare for the Investment Adviser Rule to take effect.
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If you have any questions, or would like additional information, please contact one of the attorneys on our Financial Services, Investment Funds or White Collar, Government & Internal Investigations Teams.