By Robert R. Boeche, Partner; and Alex S. Lagotta, Associate of Shustak Reynolds & Partners, P.C. posted on Monday, January 27, 2025.

Robert R. Boeche II

Partner

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 122)
Direct: (619) 546-5502
Email: [email protected]

On August 28, the Financial Crimes Enforcement Network (“FinCEN”), within the U.S. Treasury Department, issued a final rule, the Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers (“Final Rule”), which extends certain anti-money laundering (“AML”) compliance obligations to most investment advisers (“RIAs”) registered with the Securities and Exchange Commission (“SEC”), and investment advisers that report to the SEC as exempt reporting advisers (“ERAs”).  [1] RIAs and ERAs are expected to comply with the Final Rule by January 1, 2026 (the “Compliance Date”). [2]

Background

The Bank Secrecy Act (“BSA”), as amended by the USA PATRIOT Act, requires “financial institutions” to establish and maintain AML compliance programs meeting certain minimum requirements. The definition of “financial institution” encompasses several categories of financial businesses, including banks, broker-dealers, and mutual funds. However, historically, the definition has not included RIAs or ERAs. The Final Rule expands the definition of financial institution to now include “investment advisers” (i.e., RIAs and ERAs, subject to limited exceptions), thereby subjecting them to the BSA’s affirmative AML program requirements.

Requirements for RIAs and ERAs

Under the Final Rule, both RIAs and ERAs are expected to:

1. Adopt AML compliance programs; and
2. Monitor for and report suspicious activity to FinCEN. [3]

However, the Final Rule does not require RIAs and ERAs to establish customer identification programs (“CIPs”) that include risk-based procedures for identifying and verifying the identities of customers. These requirements are being addressed through separate rulemaking issued jointly by FinCEN and the SEC (“CIP Proposed Rule”), discussed below. [4]

For private fund structures, it is still unclear exactly how the term “customer” will be interpreted. The Final Rule and the CIP Proposed Rule both include language implying that the customers of RIAs and ERAs are the funds they advise, rather than the investors invested in said funds. [5] That said, the Final Rule suggests FinCEN expects RIAs and ERAs advising private funds to make a risk-based assessment of the money laundering, terrorist financing, and illicit finance activity risks presented by the investors in such funds.

In addition, FinCEN is delegating its examination authority to the SEC consistent with FinCEN’s existing delegation to the SEC of the authority to examine broker-dealers and mutual funds for compliance with AML requirements. [6]

Know Your Customer (“KYC”) Requirements – Proposed Rule

As discussed, the Final Rule does not require RIAs and ERAs to establish CIPs for identifying and verifying the identities of customers. However, on May 13, 2024, FinCEN and the SEC proposed the CIP Proposed Rule via the Federal Register for industry commentary. [7] The CIP Proposed Rule would require RIAs and ERAs to, among other things, establish, document, and maintain written CIPs appropriate for their respective sizes and business models. [8] Also, the CIP procedures would include risk-based procedures for verifying the identity of each customer to the extent reasonable and practicable within a reasonable time before or after the customer’s account is opened. [9] As of the date of this posting, the CIP Proposed Rule commentary period is closed. However, the CIP Proposed Rule issuance as a final rule and expected compliance date are currently unknown. [10]

Recommendations

In light of the Final Rule, RIAs and ERAs may wish to consider following prior to the Compliance Date:

1. Compliance Program: Implement an AML compliance program in accordance with the Final Rule.
2. Training: Educate personnel on the requirements of reporting suspicious activity through filing suspicious activity reports (“SARs”).
3. Independent Testing: Implement independent internal testing program or testing through a third-party provider.
4. Delegation: Should any compliance with the Final Rule be delegated, ensure that you have appropriate procedures to ensure such delegates are complying with the Final Rule.

For most RIAs and ERAs, implementation of the Final Rule’s requirements will require significant attention and planning. Should you have questions concerning compliance with the Final Rule, reach out to us today. 

[1] See, https://www.federalregister.gov/public-inspection/2024-19260/anti-money-launderingcountering-the-financing-of-terrorism-program-and-suspicious-activity-report.
[2] Id.
[3] In addition to requirements to adopt AML compliance programs and report suspicious activity to FinCEN, the Final Rule also includes provisions relating to recordkeeping, information sharing, special measures, and special standards for diligence not mentioned herein.
[4] See, https://www.federalregister.gov/documents/2024/05/21/2024-10738/customer-identification-programs-for-registered-investment-advisers-and-exempt-reporting-advisers.
[5] Id. See also, https://www.federalregister.gov/public-inspection/2024-19260/anti-money-launderingcountering-the-financing-of-terrorism-program-and-suspicious-activity-report.
[6] See, https://www.federalregister.gov/public-inspection/2024-19260/anti-money-launderingcountering-the-financing-of-terrorism-program-and-suspicious-activity-report.
[7] See, https://www.federalregister.gov/documents/2024/05/21/2024-10738/customer-identification-programs-for-registered-investment-advisers-and-exempt-reporting-advisers.
[8] See, https://www.sec.gov/files/bsa-1-fact-sheet.pdf.
[9] Id.
[10] See, https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202410&RIN=3235-AN34.

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