Proposed rulemaking would extend AML requirements to Registered Investment Advisers

Proposed rulemaking would extend AML requirements to Registered Investment Advisers
Posted by Bob Axelrod

On August 25, 2015, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, published a notice of proposed rulemaking that would extend anti-money laundering (AML) requirements to investment advisers registered with the U.S. Securities and Exchange Commission (SEC).  According to FinCEN, “investment advisers have an important role to play in safeguarding the financial system against fraud, money laundering, terrorist financing, and other financial crime.” As such, FinCEN believes registered investment advisers (RIAs) should be subject to certain AML requirements because money launderers and terrorist financers may be exploiting them to access the U.S. financial system. The underlying concern is that broker-dealers and banks might not presently have enough information to assess suspicious activity or money laundering risk for transactions ordered by an adviser on behalf of an unidentified client.

The proposed rule would expand the general definition of “financial institution” under the Bank Secrecy Act (BSA) to include RIAs.  Consequently, RIAs would be subject to the BSA requirements generally applicable to financial institutions, including the requirements to:

  • file Currency Transaction Reports (CTRs)
  • keep records relating to the transmittal of funds
  • respond to law enforcement requests regarding accounts or transactions for named suspects under Section 314(a) of the USA Patriot Act

Under the proposed rule, RIAs would also be required to establish AML programs and file suspicious activity reports (SARs), as well as make immediate telephone notification to appropriate law enforcement officials when RIAs identify terrorist or other serious violations that “require immediate attention.”

  • AML program requirement. A RIA’s AML program would need to be tailored to the specific risks posed by the advisory services it provides and clients it advises, covering all advisory activities whether the RIA is acting as a primary adviser or sub-adviser. RIAs would be required to create a written AML program designed to reasonably prevent the adviser from being used to facilitate money laundering or financing of terrorist activities, and to achieve and monitor compliance with the applicable provisions of the BSA and FinCEN Provide for independent testing of the AML program on a periodic basis to ensure that it complies with the requirements of the rule and that the program functions as designed. Designate a person or persons responsible for implementing and monitoring the operations and internal controls of the AML program. Additionally, provide for training of appropriate persons.
  • SAR requirements. The proposed rule would subject RIAs to file a SAR for transactions “conducted or attempted by, at, or through an investment adviser” (i) that involve at least $5,000; and (ii) for which the registered investment adviser “knows, suspects, or has reason to suspect” that the transaction is suspicious.

The proposed rule would not require RIAs to implement a Customer Identification Program (CIP) or to apply pending rules for other kinds of financial institutions to conduct customer due diligence (CDD).  However, FinCEN has said it expects to address both of these requirements through future joint rulemaking with the SEC. For now, FinCEN has requested comment on whether RIAs should be subject to a CIP requirement, and has made clear that each adviser needs to evaluate what amount and kind of CDD is appropriate in light of the risk of its business model.

Compliance with the proposed rules would be assessed by the SEC through its examination process, and non-compliant RIAs would face the risk of civil or criminal liability. For detailed information about the proposed rule and potential impact, download our full report, and consider the 22 page Federal Register notice itself here.

Bob Axelrod
Director | Deloitte Advisory
Regulatory & Compliance
Deloitte Transactions and Business Analytics LLP

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