SEC and FinCEN Propose New Anti-Money Laundering Rule for Investment Advisers
Today, the Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN) jointly proposed a new rule that would require registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to implement a written customer identification program (CIP). This comes on the heels of a separate FinCEN proposal in February 2024 to expand the definition of “financial institutions” under the Bank Secrecy Act (BSA) to include RIAs and ERAs. The rule proposed today, if adopted, would bring investment advisers in line with other types of financial institutions, such as broker-dealers and registered investment companies, which have long been subject to these obligations.
Under the proposed rule, an adviser would have to implement procedures for the adviser to form a reasonable basis that it knows the true identity of each customer, including with respect to gathering sufficient identifying information about each customer and taking appropriate steps to verify the customer’s identity. Additionally, the rule would require advisers to take reasonable steps to determine whether the customer is identified on any list of known or suspected terrorists or terrorist organizations maintained by federal government agencies.
This is not the first time that FinCEN has attempted to bring investment advisers within the scope of the BSA. A similar effort was undertaken by FinCEN in 2015, but that proposal ultimately was not adopted. Notably, the 2015 proposed rule would only have applied to RIAs whereas the rule proposed today would also encompass ERAs – further evidence of the current regulatory scrutiny on advisers to private funds. Since its failure to gain traction, there have been increasing calls from consumer advocacy organizations, law enforcement, and other groups to resurrect the 2015 proposal or otherwise subject advisers to stronger anti-money laundering regulations. Those calls apparently have been heard, but only time will tell whether the rule proposed today fares any better than its predecessor.
The proposed rule will be open for public comment for a period of 60 days after it is published in the Federal Register.