The Financial Crimes Enforcement Network (FinCEN), which is a bureau of the Department of the Treasury, has proposed rules1 that would designate SEC-registered investment advisers as “financial institutions” under Bank Secrecy Act (BSA) regulations. Currently, investment advisers, unlike such entities as broker-dealers, banks, registered investment companies, operators of credit card systems and most casinos, are not BSA “financial institutions” and not subject to the array of requirements that come with that designation.
In connection with this change, the proposal would require all SEC-registered investment advisers to (i) develop and implement a written anti-money laundering (AML) program, and (ii) as needed, report suspicious activity to FinCEN pursuant to the BSA via Suspicious Activity Reports (SARs). The proposed rules would also require affected investment advisers to file Currency Transaction Reports (CTRs) and maintain various records relating to the transmittal of funds. Although the proposed rules would apply only to investment advisers registered with the SEC, the proposing release notes that future rulemaking may affect other types of investment advisers, such as state regulated or SEC-exempt advisers. Assuming the proposed rules are adopted as written, FinCEN would delegate examination authority to the SEC.
AML Program Requirement
The proposed rules would require all SEC-registered investment advisers to adopt and implement a written AML program reasonably designed to prevent the investment adviser from being used to facilitate money-laundering or the financing of terrorism, and to ensure compliance with the BSA and BSA regulations. Under the proposal, the investment adviser’s board, or if it does not have a board, its general partner, sole proprietor or equivalent person, must approve the AML program in writing, and the investment adviser must make that program available to FinCEN or the SEC upon request. An AML program would be required to be in place within six months of applicable rules becoming effective.
In the proposing release, FinCEN notes it would impose a risk-based approach under which larger firms would be expected to employ a more complex AML program than firms with smaller and more centralized organizations. Each investment adviser’s AML program would be required to cover all of its advisory activities, whether the investment adviser is working as a primary adviser or in a sub-advisory capacity. As different types of advisory clients pose varying levels of risk, affected investment advisers would be required to conduct risk-based assessments of money laundering and terrorist financing risks presented by such clients as unregistered pooled investment vehicles and private clients.
Each investment adviser would be required to designate a person or persons responsible for implementing and monitoring the operations and internal controls of the investment adviser’s AML program, and provide for that person and other appropriate persons’ training. The proposed rules require periodic, independent AML testing, which may be carried out by the investment adviser’s employees, its affiliates or an unaffiliated third party, so long as those responsible for testing are not also involved in the operation and oversight of the program. While affected investment advisers may delegate responsibility for some elements of their AML compliance programs to appropriate third parties, ultimate responsibility for the effectiveness of the AML program will remain with the investment adviser.
Suspicious Activity Reports
The proposed rules would also require affected investment advisers to report suspicious transactions involving, in the aggregate, at least $5,000 in cash or other assets by filing SARs. As proposed, investment advisers and their agents and employees would be required to treat SARs as confidential and would not be permitted to share them even within their own corporate organizational structures. But in seeking comment on the proposed rules, FinCEN has specifically asked whether this heightened level of secrecy within a single organizational structure is appropriate. Further, as is already standard for SAR filers, where more than one financial institution is obligated to file an SAR with respect to the same transaction, only one SAR need be filed.
Investment Advisers as “Financial Institutions”
FinCEN is proposing including SEC-registered investment advisers in the definition of “financial institutions” under BSA regulations, which would impose a number of specific filing and recordkeeping requirements on those investment advisers. BSA regulations require financial institutions to file CTRs for transactions involving the transfer of more than $10,000 in currency by, through or to an investment adviser. This would replace the current requirement that investment advisers file Form 8300s upon receipt of more than $10,000 in cash and negotiable instruments.
Additionally, the proposed rules would require affected investment advisers to observe “Recordkeeping and Travel Rules” and related requirements, which mandate that financial institutions create and retain records pertaining to transmittals of funds and that this information generally “travel” with the funds to the next financial institution in the payment chain. A “transmittal of funds” includes funds transfers processed by banks, as well as similar payments for which one or more of the financial institutions processing the payment (e.g., the transmittor’s financial institution, an intermediary financial institution, or the recipient’s financial institution) is not a bank. Information that investment advisers must create, maintain, and transmit includes the transmittor’s name, address and other identifying information as well as select details about the transaction. But the proposal would exempt transmittals where certain categories of financial institutions are the transmittor, originator, recipient, or beneficiary – i.e., in instances where the originator and beneficiary are each a bank, a U.S. broker-dealer or a U.S. government agency.