AML Requirements Proposed For SEC Registered Advisers

FINCEN'S NOTICE OF PROPOSED RULEMAKING

On August 25, the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury (Treasury), published a notice of proposed rulemaking (NPRM) to impose anti-money laundering (AML) programs and additional reporting requirements on investment advisers registered with the US Securities and Exchange Commission (SEC).1

FinCEN's proposal would require registered investment advisers to have anti-money laundering programs in place, file suspicious activity reports, and comply with additional reporting requirements. The proposal furthers the United States' efforts to comply with international AML standards and recommendations.

If adopted, the NPRM would do the following:

Require that SEC-registered investment advisers (RIAs) develop and maintain written AML programs reasonably designed to prevent the RIA from being used for money laundering and terrorist financing and to achieve compliance with the Bank Secrecy Act (BSA).2 Include RIAs within the meaning of a "financial institutions" for purposes of the BSA's implementing regulations3 and impose specific reporting requirements. Require that RIAs monitor for suspicious activity and file suspicious activity reports (SARs) with FinCEN. Delegate examination authority for compliance to the SEC.4 The long-awaited NPRM comes as the United States is due to undergo in 2016 a mutual evaluation by the Financial Action Task Force (FATF), the inter-governmental body that promotes international AML standards.5 In FATF's previous evaluation of the United States, it noted (among other things) the lack of AML and CIP requirements applicable to investment advisers in the United States.6

If adopted as proposed, the rules would require RIAs to establish AML programs and begin to file SARs within six months of their effective date. Comments on the NPRM are due on or before November 2, 2015.

BACKGROUND

The BSA, as amended by the USA PATRIOT Act (Patriot Act),7 establishes the framework for AML obligations imposed on US financial institutions. The BSA provides Treasury with the authority to implement, administer, and enforce compliance with the BSA and implement regulations to that effect. This authority has been delegated to FinCEN. While broker-dealers in securities and investment companies have been subject to AML requirements for some time due in part to their being included within the definition of a "financial institution" under the BSA,8 investment advisers are not included in that definition. As a result, most of the BSA's substantive requirements are not directly applicable to investment advisers unless Treasury exercises its discretionary authority to include them within the definition.9 While FinCEN had previously proposed AML requirements for investment advisers in 200310 and unregistered investment companies (i.e., private funds) in 2002,11 FinCEN withdrew those proposals in 2007.12 At the time of withdrawal FinCEN noted that, since investment advisers conduct their activities through financial institutions that are subject to the BSA, investment adviser activities are at least indirectly subject to BSA requirements.

FINANCIAL INSTITUTION DEFINITION

For purposes of the BSA's implementing regulations, the NPRM would define an "investment adviser" as "[a]ny person who is registered or required to be registered with the SEC under Section 203 of the Investment Advisers Act of 1940."13 FinCEN indicated that the proposed definition of investment adviser would capture both primary advisers and subadvisers. In addition, FinCEN indicated that the following types of advisers may be within scope:

(i) dually-registered investment advisers, and advisers that are affiliated with or subsidiaries of entities required to establish AML programs;

(ii) certain non-U.S. investment advisers;

(iii) investment advisers to registered investment companies;

(iv) financial planners;

(v) pension consultants; and

(vi) entities that provide only securities newsletters and/or research reports.

The inclusion of RIAs within the definition of a financial institution for purposes of the BSA's implementing regulations would require RIAs to comply with the BSA regulatory requirements that are generally applicable to financial institutions, including the information sharing provisions of Section 314(a) of the Patriot Act, the currency transaction report (CTR) requirements,14 the recordkeeping and travel rule (subject to certain exceptions),15 and the requirement to create and retain records for extensions of credit and cross-border transfers of currency, monetary instruments, checks, investment securities, and credit when transactions exceed $10,000.16

AML PROGRAM REQUIREMENT

General

Proposed rule 31 C.F.R. 1010.210 (the Proposed AML Rule) would require RIAs to develop and implement an AML program reasonably designed to prevent the RIA from being used to facilitate money laundering or the financing of terrorist activities and to achieve and monitor compliance with applicable BSA provisions and implementing regulations. The Proposed AML Rule requires that each RIA's AML program be approved in writing by its board of directors or trustees, or if it does not have a board, by its sole proprietor, general partner, trustee, or other persons who have similar functions to a board of directors.

Minimum Requirements

Under the Proposed AML Rules, an RIA's AML program must, at a minimum, do the following:

Establish and implement policies, procedures, and internal controls reasonably designed to prevent the investment adviser from being used for money laundering or the financing of terrorist activities and to achieve and monitor compliance with the applicable provisions of the BSA and its implementing regulations. Provide for independent testing for compliance to be conducted by the investment adviser's personnel or by a qualified outside party. Designate a person or persons responsible for implementing and monitoring the...