News & Insights

Joint SEC and FinCEN Proposed Customer Identification Program Rule

What happened?

On May 13th, the Financial Crimes Enforcement Network (FinCEN) and the SEC jointly released a proposed rule to apply Customer Identification Program (CIP) obligations on registered investment advisers (RIAs) and exempt reporting advisers (ERAs) (press release).  This new proposal comes on the heels of FinCEN’s February 13th proposal of an AML rule to designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act and apply AML/CFT program, suspicious activity reporting and record keeping requirements. This new rulemaking “complements” the prior proposal, according to the press release. The Investment Adviser Association has asked for the public commentary to be reopened for the prior AML proposal and urged the SEC and FinCEN to take a tailored approach to address risk while avoiding unnecessary regulatory burdens, especially on smaller advisers.

The proposed rule would require RIAs and ERAs to, among other things, implement a CIP that includes procedures for:

  • verifying the identity of each customer to the extent reasonable and practicable; and
  • maintaining records of the information used to verify a customer’s identity, including name, address, and other identifying information.

These procedures should be risk-based and appropriate to the size and business lines of the firm.  Ultimately, the RIA or ERA must form a reasonable belief that it knows the true identity of each customer. This means obtaining name, date of birth or formation, address, and identification number prior to opening an account, providing customers with adequate notice of the CIP requirements, and maintaining records of verifications and information collected under the CIP for at least five years.

As proposed, persons with an existing account with the RIA or ERA would be excluded from the definition of “customer” provided the firm has a reasonable belief of the customer’s true identity.  RIAs and ERAs can also rely on other financial institutions to perform any of the procedures of the CIP, as long as the financial institution meets several federal requirements and enters into a contract with the adviser to certify annually to the performance of any specified requirements of the CIP.

What does this mean for me?

If both the AML/CFT Program Rule and the CIP Rule proposals become law, RIAs, and ERAs will need to make sure procedures are in place to verify new customers through a CIP, to complete ongoing monitoring for AML/CFT requirements, and to file suspicious activity reports.  FinCEN is proposing to delegate their examination authority of advisers to the SEC for both rules.  If these become law, advisers can expect to see exam questions on their implementation of policies and procedures to meet these expanded requirements.

If you have any questions about the proposals, or would like to speak with a regulatory expert, please let us know.