Institutions, including banks and securities broker-dealers, are subject to requirements imposed by the Bank Secrecy Act (BSA) which, among other things, mandates that they develop and implement written anti-money laundering (AML) programs designed to prevent the institution from being used for money laundering or the financing of terrorist activity. To date, investment advisers have not been included in the definition of financial institution for purposes of this requirement. However, on August 25, 2015, the U.S. Treasury Department Financial Crimes Enforcement Network (FinCEN) proposed a rule requiring certain investment advisers to establish AML programs, and report suspicious activity to FinCEN. Including these investment advisers in the general definition of “financial institution” would additionally require advisers to file Currency Transactions Reports (CTRs) and keep records relating to the transmittal of funds. As proposed, the FinCEN rule would apply only to those investment advisers registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Under the proposed rule, the SEC would be delegated the authority to examine investment advisers for compliance.
As explained by FinCEN, the proposal to bring investment advisers within the ambit of BSA requirements for AML programs aims “to regulate investment advisers that may be at risk for attempts by money launderers or terrorist financers seeking access to the U.S. financial system through a financial institution type not required to maintain AML programs or file suspicious activity reports (SARs).” AML programs currently required for financial institutions such as securities broker-dealers are built around a central “customer identification program” requirement which in the FinCEN rulemaking initiative underway would not at present be imposed on investment advisers. Nor is FinCEN proposing at this time to subject investment advisers to customer due diligence requirements recently proposed for other financial institutions. However, FinCEN anticipates addressing both of these, and other issues, as well as the application of various provisions of the USA PATRIOT Act (the “Patriot Act”), with respect to investment advisers in subsequent rulemaking.
SEC registered investment advisers have at least $100 million of assets under management, and provide a variety of advisory and investment management services to individuals and a broad spectrum of institutional clients. They regularly interact with other financial institutions, as, for example, custodial banks that hold assets managed by the adviser, and securities broker-dealers through which transactions are effected. These financial institutions may themselves be subject to the BSA and Patriot Act requirements, and FinCEN believes that the close relationship between them and investment advisers is such that advisers actually engage in activities that are similar to or related to, or a substitute for financial services that are provided by other BSA defined financial institutions, and should be subject to the same requirements of the BSA. However, because investment advisers are not subject to an AML program requirement and to SARs reporting, FinCEN believes that money launderers may see them today as a low risk way to enter the U.S. financial system. As assessed by FinCEN, investment advisers offer services that could provide money launderers, terrorist financers, and other illicit actors the opportunity to access the system. Investment advisers are seen by FinCEN as being uniquely situated to appreciate a broader understanding of their clients’ movement of funds through the financial system because of the types of advisory activities in which they engage.
As proposed, the AML Program requirement for investment advisers has four minimum requirements:
- Policies, procedures and internal controls based upon the investment adviser’s assessment of the money laundering or terrorist financing risks associated with its business;
- Independent testing for compliance to be conducted by company personnel or by a qualified outside party;
- Designation of a person or person responsible for implementing and monitoring the operations and internal controls of the program; and
- Ongoing training for appropriate persons.
AML programs already in place in the securities broker-dealer community point the way. They are risk-based, and although necessarily varying with the size of a firm and the scope of its business, all are grounded in baseline requirements under the BSA and the Patriot Act. Smaller broker-dealer firms often base their AML programs on an AML Program Compliance and Supervisory Procedures template developed by the Financial Industry Regulatory Authority (FINRA) that contains all necessary components and is reasonably designed to achieve and monitor the firm’s compliance with the requirements of the BSA and the Patriot Act. The extension of AML program and reporting requirements to investment advisers via the newly proposed FinCEN rule, particularly as currently proposed involving no formal customer identification program component that is a central feature of AML plans already in operation, does not portend a difficult transition of investment advisers in the adoption of compliant AML programs. Small and mid-size investment advisers with assets under management less than $100 million that are not registered with the SEC (and are instead subject to state regulation) would not be subject to the requirement at all. Larger advisers that would be subject to the new rule are already regulated under the Investment Advisers Act of 1940 and SEC rules that mandate the adoption and implementation of various policies and procedures. The addition of an AML program requirement and associated reporting procedures would likely mesh well with their existing compliance programs and structures. FinCEN notes as well that some investment advisers have for various reasons already implemented AML programs.
The FinCEN proposed rule has been released for comment, including requests for comments on several specific points and questions. The comment period will remain open for 60 days.