On August 25, 2015, the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury, proposed new rules that will require investment advisers that are registered with or required to register with the U.S. Securities and Exchange Commission (“SEC”) to adopt programs designed to prevent money laundering and to report certain suspicious and other activities to FinCEN pursuant to the Bank Secrecy Act (“BSA”).
For starters, registered investment advisers would be required to adopt customized anti-money laundering (“AML”) programs that are “reasonably designed to prevent the investment adviser from being used to facilitate money laundering or the financing of terrorist activities and to achieve and monitor compliance with the applicable provisions of the BSA and implementing regulations.” Such AML programs must be comprised of at least four elements:
- Advisers would need to adopt AML policies, procedures and internal controls based on the investment adviser’s identification of specific money laundering and terrorist financing risks associated with its business. This would require an adviser to consider the types of clients served and the nature of its advisory activities.
- An adviser would need to arrange for periodic independent testing of its AML program either by a qualified third party or by a firm employee that is not involved in the operation or oversight of the AML program.
- An adviser would be required to appoint a person or committee to implement or monitor the operation and internal controls of the AML program. The person or committee members should be knowledgeable concerning FinCEN’s regulatory requirements and the adviser’s specific AML risks and have sufficient responsibility and authority to develop and enforce policies and procedures designed to address such risks.
- An adviser would be required to provide ongoing training regarding the AML policies and procedures to appropriate employees.
Also, under the rule proposal, investment advisers would be required to file suspicious activity reports (“SARs”) to FinCEN with respect to suspicious activities involving at least $5,000 in funds or assets. More specifically, an adviser must file a report if it knows or suspects that the transaction or group of transactions (a) involves funds derived from illegal activities or is intended to disguise Illegal activity; (b) is designed to evade the BSA requirements; (c) has no apparent lawful purpose; or (d) involves the use of the investment adviser to facilitate criminal activity.
Additionally, an adviser must report any currency transaction (or group of related currency transactions) involving more than $10,000 that is conducted by, through or to the investment adviser on a currency transaction report (“CTR”) and keep delineated records related to the transmittal of funds.
FinCEN is also proposing to delegate to the SEC responsibility for examining investment advisers for compliance with the proposed regulations. Comments on the rule proposal must be submitted within 60 days of the publication of the rule proposal in the Federal Register. AML programs would need to be implemented within 60 days of the effective date of these proposed rules.
These requirements probably look familiar to everyone. That’s because they are required for the custodians, including banks and broker-dealers, that must be utilized in order for advisers to provide services. It’s difficult to imagine a client using an adviser to conduct money laundering or terrorist financing without having to go through a financial institution’s AML program. Therefore, the proposed rule regarding investment advisers would just add a redundant set of costly regulations on businesses.
We will continue to follow the rule proposal and will provide updates regarding any additional insights and developments.