Be Advised: Investment Advisers Face Renewed Prospect of AML/CFT Compliance Obligations

On February 15, 2024, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published a proposed rule (the Proposed Rule) in the Federal Register that, if adopted, would impose certain anti-money laundering and combating the financing of terrorism (AML/CFT) program and other Bank Secrecy Act (BSA)-related obligations on the investment adviser industry. Investment advisers covered by the Proposed Rule (Covered Investment Advisers) would be required to comply with the final rule on or before 12 months from the final rule’s effective date.^[1] 

The Proposed Rule would amend FinCEN regulations to add “investment adviser” to the definition of “financial institution”^[2]  under the BSA. “Investment adviser” would, in turn, be defined to include:

1. any person who is registered or required to register with the U.S. Securities and Exchange Commission (the SEC) under the Investment Advisers Act of 1940, as amended (“registered investment advisers” or RIAs); or
2. any person who is exempt from SEC registration under section 203 of the Investment Advisers Act because: (a) it is an adviser solely to one or more venture capital funds; or (b) it is an adviser solely to one or more private funds and has less than $150 million in assets under management (“exempt reporting advisers” or ERAs).^[3] 

The Proposed Rule would cover investment advisers located outside the United States that are RIAs or ERAs.^[4] As of July 31, 2023, there were 15,391 RIAs and 5,846 ERAs, meaning that the Proposed Rule, if adopted, would apply to over 21,000 Covered Investment Advisers.^[5] 

However, state-registered investment advisers with client assets under management of less than $100 million would not be subject to the Proposed Rule. Therefore, over 17,000 state-registered advisers (as of July 31, 2023) would be excluded from the Proposed Rule’s compliance obligations.^[6] In addition, certain other investment advisers that are exempt from SEC registration—such as foreign private advisers—would not be covered by the Proposed Rule.^[7] 

AML/CFT and Reporting Requirements

The Proposed Rule would prescribe certain AML/CFT requirements upon Covered Investment Advisers.^[8] For example, the Proposed Rule would require Covered Investment Advisers to establish AML/CFT programs with risk-based procedures for conducting ongoing customer due diligence.^[9] At a minimum, these programs must include:

1. the development of internal policies, procedures, and controls;
2. the designation of a compliance officer;
3. an ongoing employee training program; and
4. an independent audit function to test programs.^[10] 

Covered Investment Advisers would also be obligated to file certain reports, such as Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) with FinCEN.^[11]The CTR filing requirement would replace the existing requirement that investment advisers file reports for the receipt of more than $10,000 in cash and negotiable instruments using the joint FinCEN/Internal Revenue Service Form 8300 (Form 8300).^[12] 

The Proposed Rule withdraws and supersedes FinCEN’s 2015 proposed rule that would have also applied AML program, SAR filing, and other AML/CFT requirements to RIAs.^[13] 

Travel Rule; 314(b) Information Sharing and Special Measures

By defining RIAs and ERAs as financial institutions, the Proposed Rule applies the BSA’s recordkeeping regulations to these Covered Investment Advisers.^[14]  Thus, Covered Investment Advisers would be required to comply with the “Recordkeeping and Travel Rules” for transmittals of funds that equal or exceed $3,000.^[15]  Generally, under the Recordkeeping and Travel Rules, financial institutions need to create and retain records for transmittals of funds and ensure that certain information relating to the transmittal of funds “travels” to the next financial institution in the payment chain.^[16] 

The Proposed Rule would also apply information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions, and would subject Covered Investment Advisers to the “special measures” imposed by FinCEN pursuant to section 311 of the USA PATRIOT Act.^[17] 

Additional Information

• FinCEN would delegate its examination authority over compliance with the Proposed Rule to the SEC.^[18] 
• A Covered Investment Adviser would be permitted to delegate the implementation and operation of its AML programs to agents or third-party service providers, such as broker-dealers, custodians, and transfer agents, but would remain fully responsible for the program’s effectiveness and recordkeeping.^[19] 
• The Proposed Rule would not require Covered Investment Advisers to apply AML/CFT program or SAR reporting requirements to mutual funds, which have their own obligations under the BSA.^[20] 
• The Proposed Rule would require Covered Investment Advisers neither to implement customer identification program (CIP) nor collect beneficial ownership information (BOI) from legal entities. However, FinCEN plans to address CIP in a joint rulemaking with the SEC and address a BOI collection requirement in subsequent rulemakings.^[21] 
• Comments to the Proposed Rule are due on April 15, 2025.^[22] 

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[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 Fed. Reg. 12108 (Feb. 15, 2024), https://www.federalregister.gov/documents/2024/02/15/2024-02854/financial-crimes-enforcement-network-anti-money-launderingcountering-the-financing-of-terrorism (Section IV).

[2] 31 C.F.R. § 1010.100(t)(11) (proposed).

[3] 31 C.F.R. § 1010.100(nnn) (proposed); see 89 Fed. Reg. 12108 (Section VII).

[4] 89 Fed. Reg. 12108 (Section II).

[5] Id.

[6] Id.

[7] Id.

[8] 31 C.F.R. §§ 1031.200, 1031.210 (proposed).

[9] 89 Fed. Reg. 12108 (Section IV).

[10] 31 U.S.C. § 5318(h)(1).

[11] See 31 C.F.R. § 1031.300 et seq. (proposed).

[12] 89 Fed. Reg. 12108 (Section I); see 31 C.F.R. § 1010.330(a)(l)(i), (e)(l); 26 C.F.R. § 1.60501-l(e).

[13] 89 Fed. Reg. 12108 (Section I); see FinCEN, Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers, 80 Fed. Reg. 52680 (Sept. 1, 2015), https://www.federalregister.gov/documents/2015/09/01/2015-21318/anti-money-laundering-program-and-suspicious-activity-report-filing-requirements-for-registered.

[14] See 31 C.F.R. §§ 1032.400, 1032.410 (proposed).

[15] See 31 C.F.R. § 1010.410(e), (f). The Recordkeeping and Travel Rules require the transmittor’s financial institution to obtain and retain the name, address, and other information about the transmittor and the transaction as well as certain identifying information on the recipient.

[16] 89 Fed. Reg. 12108 (Section IV).

[17] Id. (Section I); see The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA Patriot Act), P.L. 107-56 §§ 311, 314(b) (2001).

[18] 31 C.F.R. § 1010.810(b)(6) (proposed).

[19] 89 Fed. Reg. 12108 (Section I).

[20] Id. (Section IV); see 31 C.F.R. § 1010.100(t)(10).

[21] 89 Fed. Reg. 12108 (Section I).

[22] 89 Fed. Reg. 12108.