On August 28, 2024, the Financial Crimes Enforcement Network (FinCEN) issued new rules targeting illicit finance risks in the investment adviser industry. Known collectively as the AML Rule, it imposes anti-money laundering and countering the financing of terrorism (AML/CFT) requirements on the majority of federally-registered and exempt reporting investment advisers.
Investment Advisers covered by AML Rule
- Investment advisers registered with or required to register with the Securities and Exchange Commission (SEC) (RIAs)
- Investment advisers exempt from registration in reliance on either Section 203(l) or 203(m) under the Investment Advisers Act of 1940 (ERAs).
What the AML Rule requires:
The AML Rule requires RIAs and ERAs (Covered Advisers) to implement AML/CFT compliance programs similar to those required of other regulated financial institutions under the Bank Secrecy Act (BSA). Specifically, they must adopt a written risk-based AML/CFT program designed to prevent the investment adviser from being used for money laundering, terrorist financing or other illicit activities. To comply with the AML Rule, investment adviser AML/CFT programs must,at a minimum:
- Develop and implement internal policies, procedures, and controls
- Designate a compliance officer responsible for implementing and monitoring the AML/CFT program
- Provide for an ongoing employee training program
- Implement an independent audit function to test the AML/CFT program
- Implement ongoing Customer Due Diligence (CDD) procedures. File Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs)
- Adhere to recordkeeping and Travel Rule requirements
The AML Rule takes effect on January 1, 2026. FinCEN stated that it will adopt a customer identification program rule, later in coordination with the SEC.
Why the AML Rule now?
Investment advisers are excluded from the statutory definition of “financial institution” under the BSA, so they haven’t been subject to the BSA’s AML/CFT program requirements. The AML Rule seeks to close that gap. Under the BSA, FinCEN authority to expand the list of entities considered financial institutions if it deems the entities’ activities are similar enough to those already under the umbrella. In this vein, the U.S. Treasury has had the investment adviser industry under its microscope for a while. Although many larger investment advisers have voluntarily implemented AML/CFT programs, regulators say the exclusion of investment advisers from the BSA’s definition of “financial institution” and required programs has left too large a hole in the U.S.’s AML/CFT fence.
High risk from criminals and foreign states
As stated in the Adopting Release, the AML Rule addresses concerns the investment adviser industry may offer a doorway into the U.S. markets for tainted assets. In its February 2024 risk assessment,4 the Treasury highlights numerous cases in which sanctioned persons, corrupt officials, fraudsters, and other criminals have exploited the investment adviser industry to access the U.S. financial system and launder dirty money. The risk assessment also details an onslaught of national security issues. Foreign states, most notably China and Russia are accessing technologies and services with national security implications by investing in early-stage companies through investment advisers and private funds.
What about RIAs outside the U.S.
For RIAs defined as “foreign-located investment advisers,” the AML Rule applies only to their advisory activities that:
- Take place within the United States, including through the involvement of U.S. personnel of the investment adviser
- Involve the provision of advisory services to a U.S. person
- Involve a foreign-located private fund with an investor that is a U.S. person
Foreign-located investment advisers relying on the foreign private adviser exemption under the ADV are not subject to the AML Rule.
Investment Advisers not covered by the AML Rule
The AML Rule adopts a narrower definition of “investment adviser” than initially proposed. It excludes from the definition RIAs that register with the SEC solely because they are:
- Mid-sized advisers
- Multi-state advisers
- Pension consultants
- RIAs that are not required to report any AUM to the SEC on Form ADV
What customers are excluded from the AML/CFT obligations
The AML Rule permits Covered Advisers to exclude certain customers from their AML/CFT obligations, including any mutual fund they advise. The following customers may also be excluded:
- Bank and trust company-sponsored collective investment funds: These funds are also advised by the investment adviser.
- Other Investment Advisers: Any other investment adviser subject to the AML Rule that is advised by the investment adviser.
Importantly, the Rule allows these exclusions without requiring the adviser to verify whether the excluded customers have implemented their own AML/CFT programs.
The AML Rule also imposes requirements on Covered Advisers to file SARs and Currency Transaction Reports (CTRs), and to comply with the Record keeping and Travel Rules. They must also adhere to the information sharing provisions of sections 314(a) and 314(b) of the USA PATRIOT Act.
Key distinction of AML Rule
CAs don’t have to collect beneficial ownership info
One notable aspect of the AML Rule is that it does not require Covered Advisers to collect beneficial ownership information for legal entity customers, a requirement that applies to other types of financial institutions. FinCEN has postponed the application of this requirement to Covered Advisers while it reviews the CDD rule in light of the AML Act of 2020. In the meantime, Covered Advisers are expected to assess whether to collect beneficial ownership information based on customers’ risk profiles as part of their CDD processes.
Who’s responsible for AML/CFT programs?
FinCEN chose not to include the proposed provision from 31 U.S.C. § 5318(h)(5) in the AML Rule. This provision would have mandated that the responsibility for establishing, maintaining, and enforcing an AML/CFT program lies with the individuals in the U.S. who are accessible to and overseen by the Secretary of the Treasury and the appropriate federal regulators. Instead, this Duty Provision for Covered Advisers will be addressed in a separate rule proposal that is currently open for public comment.
SEC to be compliance authority
FinCEN is delegating its examination authority for compliance with the AML Rule to the SEC, which is the federal regulator responsible for overseeing investment advisers. This approach lines up with FinCEN’s existing practice of delegating examination authority to the SEC for brokers and dealers that sell securities and mutual funds in compliance with the BSA and FinCEN’s regulations.
How to prepare for the AML Rule
The effective date and compliance date for the AML Rule is January 1, 2026. To prepare , Covered Advisers must establish risk-based procedures, which begin with conducting a risk assessment. This assessment will help identify potential money laundering, terrorist financing, and other illicit finance risks that could affect the Covered Adviser. However, applying the AML Rule in certain contexts, such as wrap account programs, model portfolio services, and other non-discretionary advisory services, can be challenging. Covered Advisers should consult with legal counsel experienced in both AML compliance and investment adviser regulations to navigate these complexities effectively.
Who should you talk to if you have further questions?
If you would like further information concerning the matters discussed in this Legal Insights, please contact the following:
Robert Moreiro, Partner, 904.582.8874, robert.moreiro@practus.com
Robert Rhatigan, Partner, 703.215.8011, robert.rhatigan@practus.com
Karen Aspinall, Partner, 949.629.3928, karen.aspinall@practus.com
Practus, LLP provides this information as a service to clients and others for educational purposes only. It should not be construed or relied on as legal advice or to create an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
