The new rule also prescribes standards for advisers’ AML/CFT programs and sets other reporting and recordkeeping requirements, but was scaled back from the original proposal in response to public comments that the agency received. - 29 August 2024

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule aimed at combatting illicit finance activity and national security threats in the investment adviser sector. The final rule adds certain “at-risk” investment advisers—specifically SEC-registered investment advisers (RIAs) and exempt reporting advisors (ERAs)—to the definition of financial institution under the regulations that implement the Bank Secrecy Act (BSA). It also prescribes minimum standards for anti-money laundering and countering the financing of terrorism (AML/CFT) programs to be established by such RIAs and ERAs, requires RIAs and ERAs to report suspicious activity to FinCEN, demands that they keep certain records relating to the transmittal of funds, and requires them to fulfill other obligations applicable to financial institutions that are subject to the BSA and FinCEN’s implementing regulations, such as special information sharing procedures. The final rule takes effect Jan. 1, 2026.

Need for rulemaking. According to a fact sheet released by FinCEN, the rule is designed to help address the illicit finance risks documented in a risk assessment conducted by the Treasury Department in February 2024. That assessment highlighted numerous cases in which sanctioned persons, corrupt officials, fraudsters, and other criminals have exploited the investment adviser industry to access the U.S. financial system and launder funds. It found too that foreign states—most notably the People’s Republic of China and the Russian Federation—leverage investment advisers and their advised funds through investment in early-stage companies to access certain technologies and services with national security implications. FinCEN proposed the new rule in February of this year through a Notice of Proposed Rulemaking (NPRM) and received public comments on it for two months thereafter.

Final rule modifications. The final rule reflects “careful consideration of the comments received in response to” that NPRM, as well as “extensive consultations” with staff at U.S. government agencies and industry representatives, FinCEN says. The effort it undertook to be responsive to the industry and to the public comments it received is demonstrated, according to the agency, by the final rule’s inclusion of several changes from the NPRM based on those comments. For example, the final rule adopts a narrower definition of “investment adviser” than initially proposed, and excludes from the definition (1) RIAs that register with the SEC solely because they are mid-sized advisers, multi-state advisers, or pension consultants and (2) RIAs that are not required to report any assets under management to the SEC on Form ADV. It has also been limited to apply only to advisory activities involving domestic conduct or persons. In addition, a proposed provision involving the establishment, maintenance, and enforcement of an investment adviser’s AML/CFT program was scrapped from the final rule.

Rule exclusions. The final rule includes several exclusions that are intended to “minimize potential burden from duplication of existing AML/CFT measures, while pursuing transparency initiatives to safeguard the U.S. financial system and national security,” according to FinCEN. It permits an investment adviser to exclude from its obligations any mutual fund he or she advised. The rule includes text modified from the NPRM to allow an investment adviser to carry out that exclusion without verifying that the mutual fund has implemented an AML/CFT program. It also allows an investment adviser to exclude from its obligations bank- and trust company-sponsored collective investment funds and “any other investment adviser subject to the final rule that is advised by the investment adviser.”

The new rule adopts the Suspicious Activity Reports filing requirements largely as proposed, however, and thus does not exempt investment advisers from the requirements to file Currency Transaction Reports or adhere to the Recordkeeping and Travel Rules. It applies to investment advisers the information sharing provisions of sections 314(a) and 314(b) of the USA PATRIOT Act.

Examination authority. FinCEN notes that it is delegating its examination authority for the requirements of the rule to the SEC, 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.

© 2021 CCH Incorporated and its affiliates and licensors. All rights reserved.