Practical Implications of FinCEN’s New AML Rule for Investment Advisers
FinCEN’s new anti-money laundering (AML) rule for investment advisers imposes AML obligations on both registered investment advisers (RIAs) and exempt reporting advisers (ERAs) and represents a significant development for global investment managers. For the first time, RIAs and ERAs will be required by law to establish robust AML programs, including procedures for filing suspicious activity reports (SARs). Under the new rule, the SEC will have oversight responsibility for AML compliance, and RIAs and ERAs can expect increased scrutiny from both the SEC and FinCEN with respect to AML. The compliance date for the new rule is January 1, 2026. Global investment managers should mobilize now, review existing AML policies and procedures, and prepare to implement changes triggered by this new AML rule.
Overview: AML Program Rule Requirements for Investment Advisers
On August 28, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a Final Rule1 (the “AML Rule”) that imposes anti-money laundering (“AML”) obligations on both registered investment advisers (“RIAs”) and exempt reporting advisers (“ERAs,” and together with RIAs, “Advisers”) by adding the term “investment adviser” to the definition of “financial institution” under FinCEN’s implementing regulation of the Bank Secrecy Act (“BSA”). Certain RIAs that register with the Securities and Exchange Commission (“SEC”) because they are (i) mid-sized advisers, (ii) multi-state advisers, (iii) pension consultants, and (iv) RIAs that do not report any assets under management on Form ADV are exempt from the definition of “financial institution” under the AML Rule. In addition, state registered advisers, foreign private advisers that are not registered with the SEC, and family offices are excluded from the scope of the AML Rule’s definition of “investment adviser.”
Importantly, foreign-located investment advisers, whose principal office and place of business is outside the United States, that are RIAs or ERAs, are covered under the AML Rule. However, in a key change from the proposed rule, for foreign-located investment advisers, the AML Rule’s obligations will apply only with respect to their advisory activities that take place within the United States, including through the foreign-located investment adviser’s U.S. personnel or through the involvement of an agency, branch, or office within the U.S. In addition, the AML Rule’s requirements will apply to foreign-located investment advisers that provide advisory services to a U.S. person or to foreign-located private funds that have an investor that is a U.S. person.
Although the AML Rule applies to Advisers that are dually registered as broker-dealers, banks, or Advisers operating as subsidiaries of banks, dually registered Advisers are not required to create separate AML programs for each entity. Instead, Advisers can opt to extend a single, comprehensive AML program to all their affiliated financial institutions, including their advisory businesses, providing some flexibility for firms with complex structures.
Advisers need to be prepared – but also be mindful of recent litigation successfully challenging SEC and other administrative rulemaking authority. A few key examples are the Private Fund Advisers Rule which was vacated by the courts2, a successful challenge to the SEC’s use of in-house tribunals3, the overturning of the Chevron doctrine4 and challenges under the Administrative Procedures Act and Major Questions Doctrine.5 These cases have sparked significant debate within the financial sector and indicate a trend towards future legal challenges. Global investment managers should closely monitor developments in this space.
Practical Implications for Global Investment Advisers
Advisers will be subject to SEC examination for compliance with the AML Rule
Importantly, the AML Rule grants the SEC authority to directly examine firms for compliance with FinCEN’s AML requirements. Advisers will therefore be subject to scrutiny by both the SEC and FinCEN, adding a new layer of compliance requirements and risk, including with respect to SEC examinations and potential enforcement.
Advisers will need to establish and/or update their AML program
The implementation of a formal, written AML program is now mandated under the AML Rule. Consequently, Advisers who have never formalized an AML program will need to establish AML programs, while Advisers who have already implemented AML programs voluntarily will likely need to update their existing AML program to fulfill all the requirements under the AML Rule. This is a significant development as Adviser AML programs will now be required by law, as opposed to “best practice,” and given that the SEC has oversight authority, Advisers can expect the SEC to be monitoring AML compliance closely.
At minimum, the AML program must include the following five (5) pillars:
- AML Officer – Designation of a person or persons responsible for implementing and monitoring the program;
- Policies/Procedures – Internal policies, procedures, and controls reasonably designed to prevent the Adviser from being used for money laundering, terrorist financing, or other illicit financing activities, and to achieve compliance with applicable BSA provisions and implementing regulations;
- Independent Testing – Independent testing for compliance with AML policies will now be mandatory, either by the Adviser’s personnel or by a qualified outside party;
- Training – An ongoing employee training program on AML will be required; and
- Customer Due Diligence – Appropriate risk-based procedures for conducting ongoing customer due diligence, to include (but not limited to) understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile and conducting ongoing monitoring to identify and report suspicious transactions, as well as maintaining and updating customer information. For legal-entity customers, advisers should make a risk-based determination of whether collection of beneficial ownership information is needed, based on the legal-entity customer’s risk profile, pending further FinCEN guidance and rule issuances.
Advisers should conduct risk assessments of their business and a gap analysis to determine whether any updates to their current AML program are warranted to account for the new requirements under the AML Rule. For larger financial institutions who have Adviser subsidiaries, AML programs may need to be restructured or updated to account for the application of existing AML programs to such subsidiaries. Foreign-located Advisers should also perform a gap analysis to determine how international AML programs may need to be updated for their US business/clients to account for the requirements under the AML Rule.
Advisers will need to report suspicious activity
Similarly to banks and broker-dealers, under the AML Rule, Advisers will be required to monitor for and report suspicious activity to FinCEN via suspicious activity reports (“SARs”). In the AML Rule, FinCEN clarified that a “transaction conducted or attempted by, at or through” the Adviser (a very broad standard), would need to be monitored for suspicious transactions and ultimately a SAR may need to be filed, if applicable. Under the AML Rule, Advisers will also be required to maintain copies of filed SARs and the underlying related documentation for a period of five (5) years from the date of filing. FinCEN additionally clarified that filing a SAR does not relieve an Adviser from the responsibility of complying with any other reporting requirements that may be imposed directly by the Advisers Act or SEC rules and regulations that implement the Advisers Act.
Other considerations for Advisers
The AML Rule introduces additional obligations for Advisers beyond those previously outlined. Advisers are required to file Currency Transaction Reports (“CTRs”) for certain cash, credit extensions, and cross-border transactions and create and maintain records for fund transfers, aligning with the Travel Rule and related recordkeeping obligations under the BSA. The obligation to file CTRs replaces the previous requirement that Investment Advisers file a Form 8300 for such transactions.
In addition, the AML Rule introduces some notable distinctions in the application of AML obligations to Advisers. Mutual funds are out of scope of the AML Rule because they are already covered under the BSA and should already have a BSA-compliant AML program. This exclusion also applies to collective investment funds sponsored by a bank or trust company subject to the BSA. Notably, FinCEN declined to exclude other pooled investment vehicles administered by foreign financial institutions, including SICAVs. Further, FinCEN did not exclude retirement plans advised by Advisers from the scope of the AML Rule. Consequently, Advisers will need to ensure that their AML program includes these specific investment vehicles, as appropriate, to ensure compliance with the AML Rule.
Pursuant to the AML Rule, Advisers are also subject to the information sharing procedures under the USA PATRIOT Act to detect money laundering or terrorist activity. The information sharing procedures entail, upon request from FinCEN, a search of records for specified information regarding transactions with individuals, entities, or organizations named in FinCEN’s request, and voluntary sharing amongst financial institutions under certain circumstances.
Looking ahead at the AML landscape
FinCEN is focused on amplifying the AML regulatory landscape in the U.S., resulting in other proposals for new compliance obligations for financial institutions. In a series of proposed rules, FinCEN: (i) proposed (jointly with the SEC) customer identification program (“CIP”) requirements for Advisers6; and (ii) released a new proposed rule aimed at strengthening and modernizing existing AML requirements for financial institutions7, although we note that these rules have yet to be finalized. Further, FinCEN clarified in the AML Rule that it plans to propose a revised Customer Due Diligence Rule (“CDD Rule”) and is considering how the CDD Rule would apply to Advisers. Taken together, the AML Rule and the CIP and CDD rules will create significant new obligations and risks for Advisers, including global investment managers. It is critical that global investment managers closely monitor developments in this space and prepare for these new AML obligations.
1 Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers, Final Rule, 89 FR 72156 (September 4, 2024), available at: https://www.federalregister.gov/documents/2024/09/04/2024-19260/financial-crimes-enforcement-network-anti-money-launderingcountering-the-financing-of-terrorism.
2 Nat’l Ass’n of Priv. Fund Managers v. SEC, 103 F.4th 1097 (5th Cir. 2024).
3 SEC v. Jarkesy, 144 S. Ct. 2117 (2024).
4 Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244 (2024).
5 West Virginia v. EPA, 142 S. Ct. 2587 (2022); Corner Post, Inc. v. Bd. of Governors of the Fed. Rsrv. Sys., 144 S. Ct. 2440 (2024).
6 Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers, Proposed Rule, 89 FR 44571 (May 21, 2024), available at: https://www.govinfo.gov/content/pkg/FR-2024-05-21/pdf/2024-10738.pdf.
7 Anti-Money Laundering and Countering the Financing of Terrorism Programs, Proposed Rule, 89 FR 55428 (July 3, 2024), available at: https://www.govinfo.gov/content/pkg/FR-2024-07-03/pdf/2024-14414.pdf.
