In a long-awaited development, James H. Freis, Jr., Director of the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), announced at an anti-money laundering (“AML”) conference this week that FinCEN is “revisiting the topic of investment advisers” and drafting a rule proposal that would require certain investment advisers to establish and implement AML programs.1 Currently, banks, broker-dealers, and mutual funds, but not investment advisers, are subject to FinCEN AML rules.
This is not the first time FinCEN has considered applying AML requirements to investment advisers. In 2003, FinCEN issued proposed rules under which investment advisers would be required to establish anti-money laundering programs.2 In 2008, FinCEN withdrew the proposed rule and stated that it would not go forward with regulations for investment advisers at that time, but did not foreclose the possibility that a new rule proposal and industry comment period would be revisited at a future date.3 In announcing its rule withdrawal in 2008, FinCEN noted that it had established AML rules for banks, broker-dealers, and futures commission merchants. Therefore, investment adviser activity was not completely outside the regulatory regime of the Bank Secrecy Act of 1970 (“BSA”), as investment advisers conduct business through other BSA compliant financial institutions.
Separately, Congress has also considered mandating that investment advisers implement AML programs. In early 2009, Senators Chuck Grassley and Carl Levin introduced the Hedge Fund Transparency Act of 2009.4 The Act would require, among other things, that certain private investment funds with assets under management of $50 million or more establish AML programs that meet the minimum requirements as established by the Treasury Secretary. The bill was introduced in the Senate and referred to the Senate Banking Committee. The bill was never taken up in Committee, and no bills with similar language have been introduced thus far in the current Congress.
FinCEN’s present consideration of AML requirements for investment advisers comes just months after changes to registration and reporting and recordkeeping requirements for investment advisers were implemented under Dodd-Frank. Many in the industry had expected that FinCEN would wait until the Dodd-Frank provisions were implemented before proposing a new rule affecting investment advisers. Freis confirmed this in his remarks, noting that FinCEN is “build[ing] on the changes to [the investment adviser] industry pursuant to the Dodd-Frank Act, the SEC rules implementing Dodd-Frank and other changes.”
FinCEN administers AML regulations pursuant to the BSA, which has jurisdiction over “financial institutions.” Although investment advisers are not specifically included in the definition of “financial institution,” Freis noted that the BSA authorizes the Treasury secretary to include additional entities within the definition if they engage in similar activity to financial institutions. It is unclear how “investment adviser” will be defined under the proposed rule; however, a FinCEN spokesman has stated that FinCEN will likely rely on existing SEC definitions.
While the scope and details of FinCEN’s proposed rules are still unknown, AML programs generally require, at a minimum, written policies, procedures, and internal controls reasonably designed to comply with BSA rules and regulations and to detect and report any suspicious transactions5; the establishment of an AML compliance officer to lead and monitor AML efforts; ongoing AML training for employees; and annual, independent testing of the investment adviser’s AML program. Investment advisers would be wise to begin acquainting themselves with AML programs to prepare for these possible changes. This is particularly true for independent investment advisers, who generally do not have the AML compliance infrastructure of the asset management businesses of financial institutions.