Comprehensive AML Regulations from FinCEN: What Investment Advisers Need to Know

The Financial Crimes Enforcement Network (FinCEN) finalized a significant rule aimed at combating illicit financial activities and enhancing national security within the asset management sector. This new regulation aligns the obligations of investment advisers with those already imposed on broker-dealers since 2001, providing much-needed clarity for these entities navigating the regulatory landscape.

Overview of Key Changes

Expanded Definition of Financial Institutions

One of the most notable changes introduced by this rule is the expansion of the term "financial institution" within the Bank Secrecy Act (BSA). The definition now includes:

• SEC-registered investment advisers.
• Exempt reporting advisers.

As a result, the majority of investment advisers are now subject to BSA regulations, which requires significant adjustments for firms lacking robust anti-money laundering (AML) and counter-terrorism financing (CFT) compliance mechanisms.

Core Requirements for Investment Advisers

The new rule mandates several critical actions from investment advisers, including:

1. Implementing an AML/CFT Program: Investment advisers must establish comprehensive programs tailored to mitigate the risks of money laundering and terrorist financing.
2. Filing Suspicious Activity Reports (SARs): Advisers are required to report suspicious transactions to FinCEN.
3. Maintaining Detailed Recordkeeping: Comprehensive records must be kept for all relevant transactions.
4. Information Sharing: Advisers need to share pertinent information with FinCEN, law enforcement agencies, and other financial institutions.
5. Adhering to Special Measures: Compliance with specific measures outlined in Section 311 of the USA Patriot Act is essential to manage financial crime risks effectively.

Notable Exemptions and Future Considerations

While the new regulations introduce rigorous requirements, there are also exemptions designed to ease compliance burdens. For instance:

• No Oversight Requirement: There is no mandate for U.S.-based individuals to oversee AML/CFT programs.
• Exclusion for Mutual Funds: Investment advisers can exclude mutual funds they advise from these obligations without needing to verify the funds' own AML/CFT programs.

Importantly, the final rule does not include a requirement for customer identification or the collection of beneficial ownership data for investment advisers. However, FinCEN indicates that these areas will be addressed in future regulations, possibly in partnership with the SEC.

Current Practices and Compliance Efforts

Many investment advisers have proactively adopted Know Your Customer (KYC) and Ultimate Beneficial Owner (UBO) policies to comply with BSA requirements, despite these not being mandated previously. The final rule recognizes these existing practices and aims to formalize review processes to reduce opportunities for foreign bad actors to exploit firms with inadequate compliance measures.

Compliance Timeline and Implementation Steps

Investment advisers are expected to comply with the new requirements by January 1, 2026. The SEC's Examination Division will prioritize these regulations during audits, focusing on the following key obligations:

• Development of a Risk-Based AML/CFT Program: This program must be designed to prevent the investment adviser from being used for illicit activities.
• Establishing Preventive Policies and Controls: Comprehensive measures must be in place to deter money laundering and terrorist financing.
• Conducting Independent Compliance Testing: Regular testing will ensure that the compliance measures are effective.
• Designating a Responsible Individual: Each firm must appoint a person accountable for overseeing the AML/CFT program.
• Training for Personnel: Relevant staff should receive adequate training to understand compliance requirements.
• Implementing Risk-Based Customer Due Diligence: Due diligence processes must be tailored to the specific risks associated with the firm’s customer base.

To meet the stringent new AML/CFT requirements, investment advisers must establish robust internal controls that align with BSA regulations. Consulting with legal experts is crucial to ensure that their compliance programs are sufficient and capable of enduring regulatory scrutiny, especially considering the unique circumstances of their operations, such as customer demographics and geographical exposure.

(Reference:  Fact Sheet: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers Notice of Proposed Rulemaking (NPRM))