On August 28, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a final rule to add “investment adviser” to the definition of “financial institution” under the regulations implementing the Bank Secrecy Act (BSA). The final rule defines the term “investment adviser” to include certain Securities and Exchange Commission (SEC) registered investment advisers (RIAs) and exempt reporting advisers (ERAs).[1] However, FinCEN has narrowed the definition of “investment adviser” as used in the final rule to exclude (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 (AUM) to the SEC on Form ADV. Few RIAs fall within these excluded categories.

Investment advisers that are covered by the final rule (covered investment advisers) will be required to (1) develop and implement an anti-money laundering (AML)/countering the financing of terrorism (CFT) program; (2) file suspicious activity reports (SARs); (3) record originator and beneficiary information for certain transactions; (4) respond to Section 314(a) requests under the USA PATRIOT Act;[2] and (5) implement special due diligence measures for correspondent and private banking accounts.

Background

Under the BSA, “financial institutions” must establish “reasonably designed risk-based programs to combat money laundering and the financing of terrorism,” as well as “facilitate the tracking of money that has been sourced through criminal activity or is intended to promote criminal or terrorist activity.”[3] Pursuant to authority granted by the Secretary of the Treasury, FinCEN may define a business or agency as a “financial institution” if such business or agency engages in any activity determined by regulation “to be an activity which is similar to, related to, or a substitute for any activity” in which a BSA-defined “financial institution” is authorized to engage.[4]

By expanding the reach of the BSA, the final rule seeks to address several illicit finance threats identified by the Department of Treasury in the investment adviser industry. In its 2024 Investment Adviser Risk Assessment (Risk Assessment), the Treasury Department found that investment advisers have served “as an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, and tax evasion, as well as billions of dollars ultimately controlled by Russian oligarchs and their associates.” Moreover, the Risk Assessment noted that, because certain RIAs and ERAs were not BSA-defined financial institutions, these investment advisers were not afforded the typical safe harbors that apply to BSA-defined financial institutions when filing SARs,[5] receiving and responding to law enforcement requests for information under Section 314(a) of the USA PATRIOT Act,[6] or voluntarily sharing information with other BSA-defined financial institutions under Section 314(b) of the USA PATRIOT ACT.[7]

New AML Requirements

Under the revised regulations implementing the BSA, the final rule adds the term “investment adviser” to the definition of “financial institution” at 31 C.F.R. § 1010.100(t). The final rule also adds a new provision to Section 1010.100, defining the term “investment adviser” to mean certain RIAs and ERAs. FinCEN declined to include state-registered investment advisers, foreign private advisers, and family offices (in each case as defined under the Investment Advisers Act of 1940) in the final rule’s definition of “investment adviser.” However, FinCEN “will continue to monitor activity” involving these entities “for indicia of the risks of” money laundering, terrorist financing, or other illicit finance activities and “may consider regulatory measures if appropriate.”

Through such amendments to 31 C.F.R. § 1010.100, the final rule subjects covered investment advisers to the following:

• Implementing a Risk-Based and Reasonably Designed AML/CFT Program. Under the final rule, covered investment advisers will be required to maintain an AML/CFT program by (1) developing internal policies, procedures, and controls to comply with the requirements of the BSA and address money laundering, terrorist financing, and other illicit financial risks; (2) designating an AML/CFT compliance officer; (3) instituting an ongoing employee training program; (4) soliciting independent testing of AML/CFT programs; and (5) implementing risk-based procedures for conducting ongoing customer due diligence.
• Filing SARs and CTRs. Pursuant to the final rule, covered investment advisers will be required to file SARs relevant to a possible violation of law or regulation, as well as file a Currency Transaction Report (CTR) for certain “transactions in currency” over $10,000 with FinCEN. Currently, all investment advisers report such transactions on Form 8300. Under the final rule, a CTR will replace Form 8300 for covered investment advisers.
• Complying With Recordkeeping and Travel Rules. Under the Recordkeeping and Travel Rules,[8] financial institutions must create and retain records for transmittals of funds and ensure that certain information pertaining to the transmittal of funds “travels” with the transmittal to the next financial institution in a payment chain. The final rule will subject covered investment advisers to the Recordkeeping and Travel Rules, requiring covered investment advisers to obtain and retain originator and beneficiary information for certain transactions and pass on this information to financial institutions in certain funds transmittals.
• Responding to Section 314 Requests. The final rule will require covered investment advisers to respond to law enforcement requests, pursuant to Section 314(a) of the USA PATRIOT ACT, to locate accounts and transactions of persons that may be involved in terrorism or money laundering. The rule also allows covered investment advisers to opt in to voluntary information sharing under Section 314(b) of the USA PATRIOT Act.
• Conducting Special Due Diligence Measures for Certain Accounts. Under the final rule, covered investment advisers will be required to maintain due diligence measures reasonably designed to enable an investment adviser to detect and report, on an ongoing basis, any known or suspected money laundering or suspicious activity conducted through or involving a correspondent or private banking account that is established, maintained, administered, or managed in the United States for a foreign financial institution.

FinCEN will require covered investment advisers to be in compliance with the final rule by January 1, 2026. Failure to comply with the final rule may constitute a violation of the BSA and FinCEN’s regulations.

Takeaways

Although FinCEN has extended the compliance date of the final rule from what was initially proposed, adherence to the above requirements will require considerable investment of time and resources. As such, investment advisers should ensure that they are taking steps to have appropriate policies and controls in place, including with respect to a risk-based AML/CFT program. In other contexts, these same requirements have been onerous for financial institutions and the subject of significant enforcement activity. As FinCEN has delegated examination authority for the requirements of this final rule to the SEC, covered investment advisers can expect that these programs will be a focus in future SEC examinations. Indeed, compliance with AML obligations has been a routine area that the SEC has prioritized in its examinations of broker-dealers and certain registered investment companies.[9] In addition, an investment adviser’s failure to develop and maintain an adequate AML/CFT compliance program may lead to costly and time-consuming supervisory criticisms and/or enforcement actions.

As discussed in our May 2024 Advisory, FinCEN and the SEC have also issued a joint notice of proposed rulemaking that would require certain investment advisers to establish, document, and maintain a written customer identification program (CIP) with certain procedural verification requirements (CIP NPRM). The comment period for the CIP NPRM closed on July 22, 2024. As previously stated by FinCEN and the SEC, adoption of the CIP requirements noted in the CIP NPRM would depend upon certain investment advisers being designated as “financial institutions” for the purposes of the BSA.

ENDNOTES

[1] An ERA is an investment adviser that would be required to register with the SEC but is statutorily exempt from that requirement because (1) it is an adviser solely to one or more venture capital funds, or (2) it is an adviser solely to one or more private funds and has less than $150 million in assets under management in the United States. Nonetheless, ERAs must still report basic information on Form ADV.

[2] Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. 107-56, § 314(a) (2001).

[3] 31 U.S.C. § 5311.

[4] 31 U.S.C. § 5312(a)(2)(Y).

[5] 31 U.S.C. § 5318(g)(3)(A).

[6] 31 C.F.R. § 1010.520.

[7] 31 C.F.R. § 1010.540.

[8] 31 C.F.R. § 1010.410(e)-(f).

[9] See, e.g., SEC, Examination Priorities 21 (2024).

This post comes to us from Arnold & Porter, Kaye Scholer LLP. It is based on the firm’s memorandum, “FinCEN Finalizes New AML Requirements for Investment Advisers,” dated September 13, 2024, and available here.