Deadline for comments on proposed RIA anti-money laundering requirements is November 2, 2015

October 19, 2015

The comment period for the Financial Crimes Enforcement Network’s (FinCEN) proposal to apply anti-money laundering requirements to registered investment advisers expires November 2, 2015. If the new regulations are approved, compliance would be required six months after the final rules are adopted. Below is a description of the background in which FinCEN is making its proposal, a summary of the proposed requirements and information advisers may want to consider when deciding whether to submit a comment letter. 

Pursuant to the Bank Secrecy Act (BSA), FinCEN is authorized to promulgate and enforce regulations requiring financial institutions to maintain certain records and file reports in an effort to prevent international terrorism. In September 2002, FinCEN proposed a rule to require unregistered investment companies to establish an anti-money laundering (AML) program. Later, in May 2003, FinCEN proposed AML requirements for certain investment advisers. These proposals were limited to AML requirements and did not include suspicious activity reporting requirements. Comment letters for these proposals focused on the definitions of “investment adviser,” “unregistered investment company,” the scope of an adviser’s AML program and the adviser’s ability to outsource AML compliance to a third party. Both proposals were withdrawn in November 2008, partly due to the lapse of time since the initial publication of the proposals.

The current proposal
FinCEN is proposing three regulatory changes: to bring investment advisers under the BSA reporting requirements, establish minimum standards for AML programs and apply suspicious activity reporting requirements upon advisers.

Bringing advisers within the BSA: Currently, the BSA applies to “financial institutions” pursuant to 31 CFR 1010.100(t), which is a term that currently includes banks, mutual funds, broker-dealers and some other financial-related entities. FinCEN proposes to modify the definition to include SEC-registered investment advisers and subject them to the reporting and recordkeeping requirements of the BSA and to comply with the Currency Transaction Report (CTR) filing requirements pursuant to 31 CFR 1010.311. This includes reporting requirements for transfers of more than $10,000 in a single day and recordkeeping requirements for the transmittal of funds under the Recordkeeping and Travel Rules, which requires record keeping of cross-border transfers of currency, monetary instruments, checks, investment securities and credit for transactions in excess of $10,000. 

Minimal standard for AML programs: Pursuant to FinCEN’s proposal, investment advisers would be required to develop and implement a written AML program “reasonably designed to prevent the investment adviser from being used to facilitate money laundering or the financing of terrorist activities and to achieve and monitor compliance with the applicable provisions of the BSA and FinCEN’s implementing regulations.” The AML program would need to be approved by the investment advisers’ board of directors, and the program would be available to FinCEN upon request. Finally, FinCEN’s proposal specifies four minimum requirements for the AML program:

1. The investment advisers’ AML program must establish and implement policies, procedures and internal controls based on the advisers’ assessment of the money laundering or terrorist financing risks associated with its business and review the types of advisory services provided and the nature of its clients to determine its vulnerabilities to such illicit activities. 

2. The AML program must provide for independent testing conducted by company personnel or by a qualified third party on a periodic basis to ensure compliance with the rules and effectiveness of the program. The frequency of the testing depends upon the investment advisers’ assessment of the risks posed, and the results from the testing should be promptly implemented or submitted to senior management for further action. 

3. Investment advisers must designate a person, persons or committee that is knowledgeable regarding FinCEN’s regulatory requirements, retains responsibility for implementing and monitoring the operations and internal controls of the AML program and has the authority to develop and enforce appropriate policies to respond to identified risks of money laundering or terrorist financing risks. 

4. Finally, the proposed rule requires ongoing training for employees of investment advisers regarding BSA requirements relevant to their functions, in recognizing possible signs of money laundering that could arise in the course of their duties, as well as a general awareness of overall BSA requirements and money laundering issues. 

Suspicious activity reports: FinCEN proposes to require investment advisers to file suspicious activity reports (SARs) for any suspicious activity that involves (or aggregates at) $5,000 in assets. It specifies that an investment adviser is required to report a transaction if “it knows, suspects, or has reason to suspect” that the transaction involves funds derived from illicit activity, is designed to evade the BSA requirements, has no apparent business purpose or reasonable explanation for the transaction or involves the use of an investment adviser to facilitate criminal activity. This would require advisers to evaluate client activity and design a suspicious transaction monitoring program. SARs would need to be filed within 30 days after the transaction, and FinCEN would be allowed to request supporting documentation, both of which must be maintained for five years after filing the SAR. 

Considerations for comment letters
FinCEN seeks comments on the scope and flexibility of its proposal. For example, it seeks comments on whether there is an increased risk of money laundering with respect to certain large investment advisers who are exempt from SEC registration. It similarly questions other classes of investment advisers that are not covered by the proposed rule and their increased risk of subjection to illicit actors. FinCEN additionally seeks comments on the anticipated time and monetary savings in connection with replacing Form 8300 filing requirements with a CTR filing requirement. Other issues involve including investment advisers within the definition of the term “financial institutions” and the potential loss of information with the different filing requirements that could result from the adoption of the proposed regulations. 

FinCEN highlights the risk-based nature of the proposed AML programs but questions whether such programs provide sufficient flexibility to allow advisers to develop and implement effective AML strategies without excluding certain types of advisory activity. It requests comments to address whether the scope of its proposal is appropriate and whether SARs should or should not be shared within the corporate structure, since such disclosure is impermissible under the proposed rule. 

Finally, it should be noted that the proposal may require SEC-registered investment advisers – even those that do not hold assets on their books, but instead conduct business through banks and broker-dealers – to create an AML program. And, as written, FinCEN’s proposal does not include customer due diligence requirements, although investment advisers typically have customer contact.

Registered investment advisers who may be affected by the proposed rule (RIN 1506-AB10) should provide comment letters to FinCEN by November 2, 2015. 

If you have any questions about the topics covered in this RIA Alert, please contact any member of Greensfelder’s Securities and Financial Services Group or your regular Greensfelder contact. The contact information for members of Greensfelder's Securities and Financial Services Group is located here