FinCEN Adopts AML/CFT Program and Reporting Requirements for Certain Investment Advisers
[35848]
September 13, 2024
TO: ICI MembersInvestment Company Directors SUBJECTS: Anti-Money Laundering
Compliance
Intermediary Oversight
Investment Advisers
Operations
Risk Oversight
Transfer Agency RE: FinCEN Adopts AML/CFT Program and Reporting Requirements for Certain Investment Advisers
On August 28, the Financial Crimes Enforcement Network ("FinCEN"), a bureau of the U.S. Department of the Treasury ("Treasury"), issued a final rule ("Final Rule") requiring certain investment advisers to establish anti‑money laundering/countering the financing of terrorism (AML/CFT) programs pursuant to the Bank Secrecy Act ("BSA") and to report suspicious activity to FinCEN.[1] The requirements were proposed in a notice of proposed rulemaking ("NPRM") in February 2024.[2] The Final Rule was adopted largely as proposed, with certain changes, several of which are consistent with ICI recommendations. The new requirements are discussed in more detail below.
Scope of the Final Rule
As proposed, the Final Rule expands the definition of "financial institution" to include "investment advisers," which is defined to include SEC-registered investment advisers ("RIAs") and exempt reporting advisers ("ERAs"), with certain exceptions. FinCEN narrowed the definition of "investment adviser" in the Final Rule to exclude RIAs that register with the SEC solely because they are (i) mid-sized advisers;[3] (ii) multi-state advisers;[4] or (iii) pension consultants, as well as RIAs that do not report any assets under management on their Form ADV.[5] As proposed, the definition of "investment adviser" does not include state-registered advisers.[6]
The NPRM would have included within the scope of the rule certain advisers located outside of the United States that are registered or required to register with the SEC or file Form ADV. ICI recommended that any final rule not apply to investment advisers located outside of the United States. Although FinCEN did not categorically exclude investment advisers located outside of the U.S. from the Final Rule, FinCEN clarified that the Final Rule will apply to non-U.S. investment advisers that are subject to the Final Rule when their activities "(i) take place within the United States, including through the involvement of U.S. personnel of the investment adviser, such as the involvement of an agency, branch, or office within the United States or (ii) provide services to a U.S. person or a foreign located private fund with an investor that is a U.S. person."[7]
AML/CFT Program Requirements
FinCEN adopted the minimum AML/CFT program requirements for investment advisers largely as proposed, with certain key changes.
Applicability
Investment advisers will be required to apply their AML/CFT programs to all advisory services provided to all customers, with certain exceptions. Importantly, the Final Rule retains the proposed provision that permits investment advisers to exclude mutual funds from their AML/CFT programs. Consistent with ICI recommendations, the Final Rule clarifies that investment advisers may categorically exclude mutual funds and that investment advisers need not verify that such mutual funds have implemented AML/CFT programs. Consistent with ICI recommendations, FinCEN has expanded the proposed exclusion to permit investment advisers to also exclude (i) bank- and trust company-sponsored collective investment funds that comply with relevant AML/CFT regulations, and (ii) any other investment adviser subject to the Final Rule that is advised by the investment adviser.[8]
FinCEN declined to permit investment advisers to exclude wrap accounts or separately managed accounts but notes that "the flexibility in the risk-based approach can allow an investment adviser that is a portfolio manager in a wrap-fee program or provides advisory services to a separately managed account to appropriately adjust its application of AML/CFT measures based on the presented risk."[9] Although FinCEN declined to categorically exclude exchange-listed registered closed-end funds, FinCEN states that "absent other indicators of high-risk activity, an investment adviser may treat [such funds] as lower risk."[10]
Minimum AML/CFT Program Standards
Under the Final Rule, investment advisers must adopt risk-based and reasonably designed AML/CFT programs. FinCEN reiterates that the requirement is "not a one-size-fits-all requirement" and that FinCEN intends for advisers to have flexibility to design their programs to address the specific risks of the advisory services the advisers provide and the customers they advise.[11] Covered investment advisers will now be required to:
- Establish and implement policies, procedures and internal controls reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing, or other illicit finance activities and to achieve and monitor compliance with the applicable provisions of the BSA and regulations thereunder;
- Provide for independent testing for compliance to be conducted by the adviser's personnel or by a qualified outside party;
- Designate a person or persons responsible for implementing and monitoring the operations and internal controls of the program;
- Provide ongoing training for appropriate persons; and
- Implement appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to: (i) understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; (ii) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.
As in the NPRM, FinCEN recognizes that an investment adviser may conduct some of its operations through agents and third-party service providers (e.g., broker-dealers, custodians, transfer agents, and fund administrators). The Final Rule permits investment advisers to delegate contractually some elements of their AML/CFT programs to these service providers but reminds advisers that they remain fully responsible and legally liable for, and may be required to demonstrate to examiners, compliance with all requirements.[12] FinCEN further clarified in the Final Rule that "it is permissible for an RIA or ERA to delegate the implementation and operation of some or all aspects of its AML/CFT program and other AML/CFT measures to foreign-located service providers, including fund administrator."[13]
The NPRM included a provision stating that "the duty to establish, maintain, and enforce a financial institution's AML/CFT program shall remain the responsibility of, and be performed by, persons in the United States."[14] After considering comments on this proposed provision, FinCEN determined not to include this requirement in the Final Rule. However, FinCEN notes that it continues to consider this provision (in particular, in connection with similar provisions in FinCEN's July 2024 proposed amendments to existing AML/CFT program rules) and may consider incorporating it in a subsequent rulemaking applicable to investment advisers.
As proposed, FinCEN explains that dually-registered investment advisers need not establish separate programs so long as their programs cover all of their advisory and broker-dealer activities and businesses.[15]
Suspicious Activity Reporting Requirements
FinCEN adopted the Suspicious Activity Report (SAR) filing provisions largely as proposed. Under the Final Rule, investment advisers are required to report suspicious activity by submitting SARs to FinCEN.[16] The Final Rule also addresses filing and notification procedures; retention of records; confidentiality of SARs; limitation of liability; and compliance.
By including investment advisers within the definition of "financial institution," the Final Rule also subjects advisers to Currency Transaction Report (CTR) filing requirements; the recordkeeping, transmittal of records, and retention requirements for the transmittal of funds under the Recordkeeping and Travel Rules;[17] and other related recordkeeping requirements. The Final Rule eliminates the requirement of advisers to file Form 8300 on currency transactions and instead requires them to file CTRs for transactions involving currency exceeding $10,000.[18]
Consistent with the scope of the AML/CFT program requirements, advisers are not required to satisfy these filing requirements with respect to "any mutual funds, bank- and trust company-sponsored collective investment fund, or any other investment adviser they advise subject to this rule that is already subject to AML/CFT program requirements."[19]
Information Sharing
FinCEN proposed to subject investment advisers to FinCEN's rules implementing the information-sharing procedures to detect money laundering or terrorist activity requirements of Sections 314(a) and 314(b) of the USA PATRIOT Act,[20] including with respect to mutual funds advised by the investment adviser. FinCEN adopted the information sharing provisions largely as proposed. However, consistent with ICI comments, the Final Rule provides that investment advisers may deem the information sharing provisions to be satisfied for "any mutual funds, bank- and trust company-sponsored collective investment fund, or any other investment adviser they advise subject to this rule that is already subject to AML/CFT program requirements."[21]
Special Measures and Due Diligence Requirements
As proposed, the Final Rule requires investment advisers to implement certain "special measures" if the Secretary of the Treasury determines that a foreign jurisdiction, institution, class of transaction, or type of account is "primary money laundering concern," pursuant to section 311 of the USA PATRIOT Act.[22] Similarly, the Final Rule subjects investment advisers to FinCEN's rules with respect to special due diligence requirements for private banking and correspondent accounts involving foreign persons pursuant to section 312 of the USA PATRIOT Act. Specifically, investment advisers are required to maintain due diligence programs for correspondent accounts for foreign financial institutions and private banking accounts established for non-U.S. persons. In a change from the proposal, consistent with ICI comments, investment advisers may deem these requirements satisfied for any mutual fund, bank- and trust company-sponsored collective investment fund or any other investment adviser they advise subject to the Final Rule that is already subject to AML/CFT program requirements.[23]
Compliance Date
Investment advisers are required to comply with the Final Rule by January 1, 2026. The NPRM proposed a compliance deadline of 12 months after the effective date of the regulation.
Erica Evans
Assistant General Counsel
Kelly O'Donnell
Director, Transfer Agency and Operations
Thomas Di Biasio
Legal Intern
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 72156 (Sept. 4, 2024) ("Adopting Release"), available at https://www.federalregister.gov/d/2024-19260/page-72156.
[2] 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 (proposed Feb. 15, 2024), available at https://www.federalregister.gov/d/2024-02854/page-12108.
[3] Mid-sized advisers are RIAs who have assets under management between $25 million and $100 million but who either: (i) are not required to be registered as an adviser with the state securities authority in the state where they maintain their principal office and place of business; or (ii) are not subject to examination as an adviser by the state in which they maintain their principal office and places of business. Adopting Release at 72168.
[4] Multi-state advisers are advisers who would otherwise be required to register in more than 15 states, but have less than $100 million in assets under management, and who choose instead to register with the SEC. Adopting Release at 72156, 72158, n. 23.
[5] Id. at 72168.
[6] Id. at 72178.
[7] Id. at 72172.
[8] "As applied to sub-advisers, this exclusion will permit an investment adviser (acting as sub-adviser) to exclude from its AML/CFT program another investment adviser (the primary adviser) to which it provides sub-advisory services where the sub-adviser has a direct contractual relationship with the primary adviser and not with the underlying customer of that primary adviser. The investment adviser may also be able to exclude wrap-fee programs, separately managed accounts, or other advisory relationships, so long as the customer is another investment adviser . . . and the adviser does not have a direct contractual relationship with the underlying customer of the other investment adviser." Id. at 72184.
[9] Id. at 72156, 72182.
[10] Id. at 72191.
[11] Id. at 72181.
[12] Id. at 72188.
[13] Id. at 72156, 72189.
[14] Id. at 72197.
[15] Id. at 72187.
[16] The Final Rule requires an investment adviser to report a transaction that involves or aggregates to at least $5,000 in funds or other assets if the investment adviser knows, suspects, or has reason to suspect that such transaction: (i) involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity; (ii) is designed to evade the requirements of the BSA; (iii) has no business or apparent lawful purpose, and the investment adviser knows of no reasonable explanation for the transaction after examining the available facts; or (iv) involves the use of the investment adviser to facilitate criminal activity. Adopting Release at 72156, 72276.
[17] Under the Recordkeeping and Travel Rules, 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 the payment chain. Id. at 72180. In response to commenters, FinCEN provided some additional guidance in the Final Rule, including that, "FinCEN notes that in circumstances where an adviser's customer has a direct account relationship with a qualified custodian that is subject to AML/CFT requirements, including the Recordkeeping and Travel Rules, such as a bank or broker-dealer, and requests that such qualified custodian initiate a funds transfer or transmittal of funds, the adviser would generally not be required to comply with the requirements of the Recordkeeping and Travel Rules. In this circumstance, the qualified custodian would have the obligation to comply with the Recordkeeping and Travel Rules as the entity that received the instruction and transmitted the funds." Id.
[18] Id. at 72214.
[19] Id. at 72157.
[20] Section 314(a) provides for the sharing of information between the government and financial institutions and allows FinCEN to require financial institutions, upon a request from FinCEN, to expeditiously search their records to determine whether they have maintained an account or conducted a transaction with a person that law enforcement has certified is suspected of engaging in terrorist activity or money laundering. 89 FR 72156, 72205. Section 314(b) provides financial institutions with the ability to share information with one another regarding parties suspected of terrorist or money laundering activities, under a safe harbor that offers protections from liability, in order to identify better and report potential money laundering or terrorist activities. Id.
[21] Id. at 72157.
[22] Id. at 72237.
[23] Id. at 72205.