ICI Files Comment Letter on FinCEN Proposal regarding AML/CFT Program and Reporting Regulations for Certain Investment Advisers

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April 15, 2024

TO: ICI Members
AML Compliance Working Group SUBJECTS: Anti-Money Laundering
Compliance
Intermediary Oversight
Investment Advisers
Operations
Risk Oversight
Transfer Agency RE: ICI Files Comment Letter on FinCEN Proposal regarding AML/CFT Program and Reporting Regulations for Certain Investment Advisers

In February, the Financial Crimes Enforcement Network (FinCEN) proposed new rules requiring SEC-registered investment advisers and exempt reporting advisers to establish anti-money laundering/countering the financing of terrorism (AML/CFT) programs and report suspicious activity to FinCEN, along with other related requirements.[1]

Background

This proposal is the third time FinCEN has proposed similar rules for investment advisers. In 2003 FinCEN published a notice of proposed rulemaking to require certain investment advisers to establish and implement AML programs.[2] FinCEN never finalized the proposal, and formally withdrew it in 2008.[3] In 2015, FinCEN released new proposed rules aiming to bring certain investment advisers within the definition of BSA-covered entities, yet again did not adopt new rules. In connection with this latest 2024 proposal, FinCEN has withdrawn the 2015 proposal.

Broadly speaking, FinCEN proposed five regulatory changes affecting investment advisers that are registered or required to register with the SEC (RIAs) as well as investment advisers that report to the SEC as Exempt Reporting Advisers (ERAs, and together with RIAs, "investment advisers"). FinCEN is putting forth this proposal based on Treasury's assessment that investment advisers pose a material risk of misuse for illicit finance, and that applying comprehensive AML/CFT measures to these advisers is likely to reduce this risk.[4]

These five proposed changes for investment advisers include:

• expanding the definition of "financial institution" to include "investment adviser" in the regulations implementing the BSA and adding a definition of "investment adviser;"
• requiring them to establish AML/CFT programs;
• requiring them to file suspicious activity reports (SARs) and maintain records of originator and beneficiary information for certain transactions;
• applying information sharing provisions between and among FinCEN, law enforcement agencies, and certain financial institutions;
• and requiring them to implement special measures and special due diligence requirements for correspondent and private banking accounts.

Many elements of the proposal are similar or identical to those in the 2015 proposal. Two main differences, however, are that (i) investment advisers would not be required to apply these new requirements to their mutual funds and (ii) these requirements would cover ERAs as well.

FinCEN did not propose a customer identification program requirement for investment advisers and did not included an obligation to collect beneficial ownership information for legal entity customers; FinCEN indicated that it expects to address these obligations in subsequent rulemakings.

ICI Comment Letter

ICI filed a comment letter on April 12, 2024 commenting on several aspects of the proposal. ICI's comments focus on aspects of the proposal that impact service that investment advisers provide to retail investors. In the letter, ICI strongly supports the proposal's exclusion of mutual funds (a term that, as defined by FinCEN, also includes open-end ETFs) from the scope of an investment adviser's AML/CFT program, given that these funds are already subject to similar requirements. In addition, we recommend that any final amendments and guidance:

• Allow an investment adviser to exclude from its AML/CFT program any financial institution that it advises that is subject to AML/CFT obligations under the BSA rules, including collective investment trusts (CITs), other investment advisers (e.g., in connection with subadvisory relationships), and wrap fee programs (e.g., where another financial institution acts as the program sponsor);
• Categorically exclude mutual funds and other financial institutions subject to AML/CFT obligations to which the adviser provides advisory services (i.e., the exclusion should not be conditioned upon an adviser's determination that these entities have implemented compliant AML/CFT programs);
• Fully exempt mutual funds from an investment adviser's AML/CFT program, including from the adviser's requirements under the proposed information sharing rules and rules requiring an adviser to comply with certain due diligence and special measures;
• Recognize that certain non-excluded pooled investment vehicles (e.g., registered closed-end funds and unit investment trusts) present lower AML/CFT risks; and
• Not extend to non-US investment advisers.

 

 

Kelly O'Donnell
Director, Transfer Agency and Operations

Erica Evans
Assistant General Counsel
 

Notes

[1] Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers, 89 FR 12108 (Feb. 15, 2024) (the "proposal"), available at https://www.govinfo.gov/content/pkg/FR-2024-02-15/pdf/2024-02854.pdf. For a summary of the proposal, see ICI Memo 35627, available at https://www.ici.org/memo35627.

[2] Anti-Money Laundering Programs for Investment Advisers, 68 FR 23646 (May 5, 2003), available at https://www.govinfo.gov/content/pkg/FR-2003-05-05/pdf/03-10840.pdf. See Institute Memorandum No. 15974, dated April 29, 2003, for a summary of the 2003 proposal.

[3] Withdrawal of the Notice of Proposed Rulemaking; Anti-Money Laundering Programs for Investment Advisers, 73 FR 65568 (Nov. 4, 2008), available at www.sec.gov/about/offices/ocie/aml/73fr65568-69.pdf.

[4] Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers, 80 FR 52680 (Sept. 1, 2015), available at https://www.govinfo.gov/content/pkg/FR-2015-09-01/pdf/2015-21318.pdf. See Institute Memorandum No. 29323, dated September 8, 2015, for a summary of the 2015 proposal.