Photo by Nancy Kamergorodsky
Photo by Nancy Kamergorodsky

Earlier this week, the Financial Crimes Enforcement Network (“FinCEN”) proposed a rule that would require investment advisers registered with the Securities Exchange Commission (“SEC”) to establish anti-money laundering (“AML”) programs and report suspicious activity to FinCEN pursuant to the Bank Secrecy Act (“BSA”). FinCEN’s proposed rule would also add “investment advisers” to the general definition of “financial institution,” which, among other things, would require such advisers to file reports and keep records relating to certain transfers of funds. The public comment period for the proposed rule will commence once the proposed rule is published in the Federal Register and will continue for a period of 60 days. In the spirit of public debate, here are a few of our initial thoughts regarding the proposed rule:

  • The rule would require those investment advisers registered with the SEC to comply with its obligations. Generally speaking, only those investment advisers who manage $100 million or more in client assets must register with the SEC. This, in addition to the laundry list of exemptions from the SEC’s registration requirements, appears to leave a gaping whole through which potential money launderers may nonetheless access the United States financial system through an investment adviser, i.e., through small, midsize, or other unregistered advisers.
  • Most, if not all, investment advisers regularly work with financial institutions already subject to BSA requirements, such as when executing trades through broker-dealers to purchase or sell client securities, or when directing custodial banks to transfer assets. And if FinCEN’s August 2014 proposed rule requiring financial institutions to identify and verify the beneficial owners of legal entity customers comes to fruition, it may, in many cases, expand the scope of customer due diligence for banks and broker dealers with respect to their investment adviser customers and, in turn, the customers of their investment adviser customers. Thus, in many ways, imposing BSA compliance obligations on registered investment advisers might be unnecessarily duplicative.
  • FinCEN’s proposed rule would not require registered advisers to develop and maintain a customer identification program (“CIP”) or comply with certain other AML requirements applicable to financial institutions. While FinCEN has, in other cases, omitted CIP requirements for certain financial institutions, it did not do so with respect to broker dealers and, given FinCEN’s emphasis on investment advisers’ ability to appreciate a broader understanding of their clients’ movement of funds through the financial system, a CIP might actually be a key to accurately capturing and utilizing that broad understanding.
  • FinCEN is proposing to delegate its authority to examine investment advisers for compliance with these requirements to the SEC. Even assuming the SEC isn’t busy enough already, given the issues discussed above, the increase in supervisory and enforcement burden on the SEC may not be justified.

Feel free to join the debate, and please contact us if you have any questions regarding the proposed rule, the BSA or AML compliance generally. After the close of the public comment period, the proposed rule will be subject to additional review and revision based on public comments before it is finalized by FinCEN.