On 25 August 2015 the Financial Crimes Enforcement Network (FinCEN), a division of the US Treasury Department responsible for enforcing the federal Bank Secrecy Act (BSA), published proposed rules that would impose BSA requirements on investment advisors registered with the US Securities and Exchange Commission (SEC).

FinCEN’s rules implementing the BSA do not currently include investment advisors in the definition of “financial institutions” that are subject to its requirements, although the statute provides authority to FinCEN to expand the definition of a financial institution to do so. The proposed rules would add investment advisors that are registered or required to be registered with the SEC (RIAs) to the definition of a financial institution subject to the anti- money laundering (AML) program requirements of the BSA. The proposed rules would not apply to investment advisors that are not required to register with the SEC, such as state-regulated investment advisors or investment advisors that are exempt from SEC registration; however, FinCEN has requested comment on whether to expand coverage to additional types of investment advisors in future rule-makings.

As financial institutions under the BSA, RIAs would be subject to reporting and record-keeping requirements for certain transactions involving currency, fund transmittals, extensions of credit and cross-border transfers. The proposed rules would also require RIAs to comply with FinCEN’s AML regulations, including requirements to develop an AML program and report suspicious activity. To be compliant, an RIA’s AML program would need to (1) include policies and procedures reasonably designed to ensure compliance with the BSA and prevent money laundering or terrorist financing through the investment advisor; (2) provide for independent testing for compliance by internal personnel or an outside auditor; (3) designate an individual or committee responsible for implementing and monitoring compliance with the AML program; and (4) provide for ongoing BSA/AML training for appropriate employees.

In addition, the proposed rules would require RIAs to include policies and procedures in their AML programs to monitor for and report suspicious activity to FinCEN. Such suspicious activities could include, for example, a client that refuses to reveal information concerning their business activities, furnishes unusual or suspicious identification or business documents, displays a pattern of inexplicable or unusual withdrawals contrary to their stated investment goals, or exhibits a complete lack of concern for performance returns or risk. An RIA that detected these or other suspicious activities would be required to report the activity to FinCEN within 30 days and comply with ongoing requests for information from FinCEN and other law enforcement agencies.

FinCEN had previously proposed rules to apply BSA/ AML requirements to investment advisors in 2002 and 2003. The rules were never finalised and FinCEN eventually withdrew the proposals in 2008, stating that it would continue to consider whether to apply BSA requirements to investment advisors. FinCEN’s position was that, because their activities were largely conducted through other BSA-compliant entities, such as banks and broker-dealers, investment advisors were not entirely outside the existing BSA regulatory regime. As a result, there has been significant confusion among financial services companies over the extent to which investment advisors are expected to develop AML programs or otherwise comply with BSA requirements. Thus, for various reasons, many investment advisors already haven policies and procedures in place designed to be consistent, if not fully compliant, with AML program requirements that apply to other types of financial institutions. Some investment advisors developed such programs due to the lack of clarity in FinCEN’s prior proposed and withdrawn rules, as a requirement of doing business with a BSA- compliant counterparty, or as part of compliance with the enterprise-wide AML program of a BSA-compliant affiliate. While regulatory burdens on RIAs will increase if FinCEN proceeds with a version of the proposal, a final rule should at least bring clarity to a persistent compliance issue among financial services companies.

As part of its rulemaking, FinCEN requested comments on several issues, including whether other types of investment advisors should be subject to BSA/AML requirements, the minimum requirements for AML programs, and whether RIAs should be subject to other FinCEN regulations such as customer identification and verification requirements. Parties interested in commenting on the proposal should be aware that comments are due no later than 24 October 2015.

Note that the proposed application of BSA/AML requirements to investment advisors is separate from requirements to comply with US trade sanctions enforced by the US Office of Foreign Assets Control (OFAC). Such requirements, including the prohibition on doing business with parties on the OFAC’s Specially Designated Nationals list, apply to all individuals and entities within the US, including investment advisors.


Markets have reached new records of volatility. In the United States, we have recently witnessed a Dow Jones Industrial Average fall of over 1,000 points (a 6.6% loss at the nadir) – the worst drop since October of 2008 – only to be followed by whiplash momentum of trading near the close which erased a good portion of the losses. The Dow closed down nearly 600 points. The following week witnessed a 500-point drop, followed the next day by a 300-point gain. Not long before, crude oil plummeted south of US$40 a barrel on the New York Mercantile Exchange for the first time in six-and-a-half years;Brent Crude trading in London saw similar volatility. Oils seem emblematic of much of the commodity sector, from other energy products to metals to agricultural commodities—most are down and many such markets are volatile. There is no question that all of this is a major concern. So, what should we make of all the volatility and market meltdowns?

It leads former regulators like us to ask: “Are markets morphing in the ways we anticipate? Are existing rules and regulations appropriate? Is there a greater indication about what policymakers should, or should not, do?

First, on other rules and regulations: While regulations seem like a bad thing to many who talk about the unfair “regulatory burden” of Dodd-Frank (the Wall Street Reform and Consumer Protection Act of 2010), EMIR (the European Market Infrastructure Regulation) and MiFID (the Markets in Financial Instruments Directives I and II), there is no question that markets are on a safer footing than prior to the 2008 economic collapse. That is, in large part, because of regulation. Financial institutions (such as “too big to fail” banks) are less systemically important to the economy; over-the-counter trading with no oversight is now regulated; numerous rules place investors and consumers first when it comes to regulatory concerns; and in the meantime, since these are global markets, many foreign regulators outside of the US and European Union are looking to these regulatory policies as their own prototypes, which is principally noteworthy, given inter-related global markets. Regulation has been, by and large, positive in our judgement.

That said, while more regulation does not appear to be needed, regulators can do a better job of harmonising existing rules (like central counterparty clearing), and at the same time examining the existing market structure which has expanded with a myriad of trading venues. More trading exchanges and so-called “dark pool” venues have, more than at any time in history, created market fragmentation that is both new and potentially destabilising. This is a new trading world, and the old saying “we do not know what we do not know” rings very true. Similarly, exchanges around the world should look to examine various circuit breakers (market pauses and halts). Inconsistencies, be they at single exchange venues or in dark pools, should be better harmonised to avoid exacerbating arbitrage when market volatility exists.

Finally, does the recent market volatility (in equities and commodities) say anything serious or significant that should be taken into consideration by monetary policy officials at central banks? In our opinion, yes. Some officials (be they at the US Federal Reserve or the European Central Bank (ECB)) delink market moves from economic data: the economic data, they contend, is not only paramount in making decisions, but market volatility moves should not receive much, if any, attention. Others, like us, take a more straddled position. Global economic progress is less than we would all desire, and, to an extent, interest rates remaining low is a good thing. While there will always be one factor or another to provide the economic naysayers with data to argue against a Fed or ECB rate hike, what we do not want to do is slow the economic recovery by moving too soon. What that means for us is that market volatility does, and should, play a factor in looking at all of the economic data (much of which, thankfully, is positive). Prior to any central bank decisions about raising rates, more timely data will exist and a fulsome judgement can be made. However, discounting market volatility as, at least, an important factor in such determinations would be a mistake.

Most people like the idea of free markets. They contend, “let supply and demand fundamentals set price discovery”. While that is fine in concept, there are clearly certain regulatory and policy determinations that need to be examined, and the recent volatility and market meltdowns must be taken into consideration to ensure a full-on data driven approach to charting the future.