FinCEN Proposes AML Rule for SEC Registrants and Exempt Reporting Advisers, Again

February 22, 2024

What Happened?

On February 13, 2024, the Financial Crimes Enforcement Network (FinCEN) proposed a new rule to combat the investment of illicit funds in the U.S. financial system. The proposed rule would require certain investment advisers to apply Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) requirements pursuant to the Bank Secrecy Act (BSA).  Specifically, SEC registrants (RIAs) and exempt reporting advisers (ERAs) would be added to the list of businesses classified as “financial institutions” under the BSA, for more see the Fact Sheet.

In 2001, FinCEN stopped short of including advisers in AML/CFT requirements that were imposed on broker-dealers and other financial institutions under the BSA as part of the USA PATRIOT Act.  While AML monitoring has been a best practice, and some advisers operating in connection with banks or broker dealers have been subject to such requirements, this new proposed rule would cause most advisers to be subject to AML/CFT requirements. 

This will not happen overnight, as the proposed rule is open for public comment until April 15, 2024.  Also, even if the proposed rule were to be adopted  after the public commentary period, advisers would still have 12 months from the effective date of the final rule to come into compliance.  Still, there is a lot to digest in this proposed rule. 

What is Covered by the Proposal 

The proposed rule would require RIAs and ERAs to meet certain requirements, including: 

• Developing and implementing an AML/CFT program; 
• Adopting policies and procedures designed to comply with BSA and to prevent the adviser from aiding illicit financial activities; 
• Filing Suspicious Activity Reports (SARs) with FinCEN, among other reporting;  
• Conducting independent testing of the AML/CFT program; and  
• Meeting certain recordkeeping requirements, including retaining records relating to the transmittal of funds. 

In addition, the proposed rule would extend existing information-sharing provisions between FinCEN, law enforcement, and financial institutions to advisers.  Lastly, FinCEN proposes to delegate examination authority for the rule to the SEC.  Meaning BSA compliance could one day be part of regular SEC examinations. 

What Is Not Covered by the Proposal 

The proposed rule does not include additional requirements for mutual funds, as these are already defined as “financial institutions” under BSA.  

The proposed rule also does not include: 

• Customer identification requirements – FinCEN will likely address this in an upcoming joint rulemaking with the SEC. 
• Collection of beneficial ownership information for legal entity customers- FinCEN will likely address this in a future FinCEN rulemaking. 

What Does This Mean For Me?

Safeguarding the investment adviser sector, increasing useful information for law enforcement, and protecting the U.S. financial system are benefits to the economy. However, FinCEN could have applied similar requirements to advisers in 2002, 2003 and 2007, but did not. FinCEN proposed a rule for advisers, excluding ERAs, back in 2015. That rulemaking was never finalized, though a lot has changed in technology, cybersecurity, and geopolitics since then.  RIAs and ERAs should assess their current policies and procedures and determine what changes might be needed if this new proposed rule goes into effect. 

If you have any questions or would like to speak with one of our regulatory experts, let us know.