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On August 28, 2024, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued its final rule expanding the definition of a financial institution under the Bank Secrecy Act (BSA) to include certain investment advisors. With the rule, FinCEN imposes anti-money laundering and countering the financing of terrorism (AML/CFT) requirements on certain registered investment advisors (RIAs) and exempt reporting advisors (ERAs).
This final rule is the culmination of more than 20 years of efforts to safeguard the investment advisor industry from being used to launder illicit funds, and to reduce the national security risks present in venture capital investments from China and Russia.
While the final rule doesn’t substantially differ from the version of the rule presented in February’s Notice of Proposed Rulemaking (NPRM), FinCEN did adjust some aspects of the rule based on public comments. The changes cover:
Exemptions to the definition of investment advisor. Due to comments raising concerns about the burden the rule imposes on smaller advisors that FinCEN has determined to be lower risk, the following RIAs have been exempted from inclusion in the definition of a financial institution as it pertains to the rule:
Narrowed application for foreign-located investment advisors. FinCEN qualified the application of the rule for RIAs and ERAs registered with the SEC that have a principal office and place of business located outside the United States. The final rule only applies to advisory activities with a U.S. nexus. This includes:
Foreign-located investment advisors (IAs) are required to conduct “look-throughs” to determine which foreign-located private funds have U.S. investors.
Citing the need to develop further guidance, FinCEN is not including the implementation of 31 U.S.C. § 5318(h)(5) (the “Duty Provision”) in this rule. That provision would have made the establishment, maintenance, and enforcement of the AML/CFT program the responsibility of a U.S. person subject to oversight and supervision by U.S. regulators. While not part of this rule, FinCEN has indicated that it may include the provision in subsequent rulemaking.
Extended compliance date. The final rule established a compliance date of January 1, 2026. This represents an extension of the timeline of 12 months from the effective date of the final rule as indicated in the NPRM.
Narrowed requirements for RIAs and ERAs subject to the rule. The final rule allows advisors to exclude certain investment funds from the AML/CFT program requirements. Advisors may exclude mutual funds from such programs and are not obligated to verify that any mutual fund has implemented an AML/CFT program. Also excluded are bank and trust company-sponsored collective investment funds that comply with the requirements of 12 CFR 9.18.
Aside from the changes mentioned above, requirements in the final rule remain the same as what were in the NPRM. The IAs that are now considered to be financial institutions will be subject to BSA/AML requirements and SEC examination. The final rule requires covered IAs to:
Covered IAs will also be permitted to voluntarily share information with other financial institutions pursuant to Section 314(b) of the USA PATRIOT Act.
Anyone affected by these rules should consider:
Exploring options for a customer identification program (CIP). While this final rule doesn’t include requirements for IAs to implement a CIP, it does allow FinCEN and SEC to issue requirements in a separate rule. On May 28, 2024, the agencies issued an NPRM on this subject detailing anticipated requirements. It included a statement that those requirements would depend on IAs first being designated as financial institutions. Now that the AML final rule has been issued, IAs can expect a final rule on CIP requirements soon.
Implementing a risk-based beneficial owner identification program. Although FinCEN will require covered IAs to implement risk-based procedures for conducting ongoing due diligence as prescribed in the Customer Due Diligence (CDD) Rule, categorical identification and verification of beneficial owners isn’t required at this time. IAs should still consider implementing a risk-based program soon to collect beneficial ownership information based on customer risk profiles. While FinCEN plans to address beneficial ownership of legal entity customers when the CDD rule is revised pursuant to the Corporate Transparency Act, it will require some level of beneficial ownership collection. That’s why it makes sense to start the process now.
Conducting look-throughs and evaluating future exposure. Foreign-located RIAs and ERAs with at least one U.S. investor in a foreign-located private fund need to start conducting look-throughs to ensure that any customers and investors in the foreign-located private funds they advise are within the scope of the rule. Foreign-located IAs that are not currently in scope will also need to determine whether their controls are adequate to identify whether such requirements could be triggered in the future.
Assessing broader risk and compliance concerns within current operating models. To avoid siloes and effectively integrate all risk and compliance considerations within their current operating model, IAs may need additional guidance from experts. At Guidehouse, our seasoned teams have decades of experience in the IA and securities industry—including former FinCEN leaders who have helped develop relevant AML/CFT rules—and advise clients on:
AML/CFT risk assessment, program design, execution, and management.
1 Guidehouse, “New Anti-Money Laundering Rules for Investment Advisers.”
2 “12 CFR 9.18 -- Collective Investment Funds.” 2024. Ecfr.gov. 2024. https://www.ecfr.gov/current/title-12/chapter-I/part-9/subject-group-ECFR129c8723f2e5dc7/section-9.18.
3 To limit administrative burdens, the final rule doesn’t require that IAs purchase any new technology in order to comply. Because IAs are also not categorically required to collect beneficial ownership information for private funds, they’re expected to respond solely for the fund and not for the underlying investors of the fund.
4 As noted in the changes, IAs may exclude mutual funds, collective investment funds, and other investment advisers they advise that are subject to this rule.
5 “Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers.” 2024. Federal Register. May 21, 2024. https://www.federalregister.gov/documents/2024/05/21/2024-10738/customer-identification-programs-for-registered-investment-advisers-and-exempt-reporting-advisers.
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