14 February 2024

FinCEN's proposed investment adviser rule: What you need to know

The Financial Crimes Enforcement Network (FinCEN) recently proposed a new rule to establish anti-money laundering and countering the financing of terrorism (AML/CFT) requirements for certain investment advisers.

The proposed rule addresses gaps in the current regulatory framework and mitigates risks associated with money laundering and other financial crimes involving the investment advisory industry.

As investment advisers oversee trillions of dollars of assets and provide services like other financial institutions, bringing them into the fold of AML/CFT regulation has significant implications. MBK Search breaks down FinCEN’s new rule’s key requirements and changes proposed.

Covered Investment Advisers

The proposed rule would apply to SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs). Specifically, it covers advisers required to register with the SEC or those exempt from SEC registration under specific provisions.

Notably, most state-registered advisers would be fine. The proposed rule also does not cover advisers’ activities involving mutual funds, as mutual funds already have their own AML/CFT obligations.

AML/CFT Program Requirements

A core component of the proposed rule requires covered RIAs and ERAs to implement a written AML/CFT program approved by senior management. The program must include internal policies, procedures, and controls to guard against money laundering and terrorist financing risks.

Key aspects of the AML/CFT programs would include:

Designating a Compliance Officer:

  • Investment advisers must designate an individual or committee responsible for overseeing AML/CFT compliance. This person(s) should have appropriate knowledge, competence, and authority.
  • For larger firms, this may be a dedicated role. Smaller firms can dual-hat personnel like the chief compliance officer.

Conducting Employee Training:

  • Covered investment advisers must carry out AML/CFT training for appropriate staff. This includes training on regulatory requirements, money laundering/terrorism financing risks, and identifying suspicious activity.
  • Training should be risk-based and cover those whose duties may expose them to illicit finance risks. It must be conducted when an employee assumes such responsibilities.

Independent Testing of Program Compliance:

  • Investment advisers must provide for periodic independent testing of their AML/CFT program’s compliance. This can be done internally or by an external party. Testing would assess if the program met requirements and functions properly to discover deficiencies. Testing frequency can be risk-based.

Risk-Based Ongoing Customer Due Diligence:

  • Investment advisers must have risk-based procedures for conducting ongoing customer due diligence. This consists of:Understanding customer relationships to develop a risk profile.Ongoing monitoring to identify suspicious activity and update customer information.

Implementing Procedures in Line with BSA:

  • The AML/CFT program must include internal policies, procedures, and controls designed to ensure compliance with BSA requirements and prevent illicit financial activities.

Suspicious Activity Reporting

  • The proposed rule would mandate RIAs and ERAs to file Suspicious Activity Reports (SARs) on transactions of $5,000 or more when illicit activity is suspected. The filing deadlines and procedures outlined are aligned with existing SAR regulations.

Filing CTRs Instead of Form 8300s:

  • Investment advisers must file CTRs for currency transactions above $10,000 instead of the current Form 8300 requirement. This aligns with other financial institutions.

Recordkeeping and Travel Rules:

  • Investment advisers must comply with the Recordkeeping Rule and Travel Rule in the BSA, which require:Obtaining/recording information on originators/beneficiaries for funds transmittals ≥ $3,000Travel Rule – Ensuring such information “travels” with certain transmittals

By extending core pillars of AML/CFT compliance to RIAs and ERAs, the proposed rule aims to mitigate exploitation risks and collect useful financial information for authorities.

Staffing and Resourcing Implications

Investment advisers would likely need to devote significant staffing capacity and resources to develop, implement, and oversee the extensive AML/CFT compliance stipulated under this proposed rule.

Firms needing comprehensive AML/CFT policies may need to create and fill new compliance positions and roles to handle the additional responsibilities. This includes potentially hiring dedicated AML/CFT compliance officers, consultants, and other personnel to develop training programs, draft internal policies/procedures, handle due diligence processes, and review alerts for suspicious activity reporting.

For instance, investment advisers may need financial crime specialists to file higher quality, more complete SARs as required.

MBK Search’s industry-trained GRC hiring experts are on hand to advise any firms thinking about boosting their compliance teams. Speak to us today.

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