Investment Adviser Sector and FinCEN

FinCEN seeks to safeguard the investment adviser sector from illicit finance as evidenced by the issuance of the Final Investment Adviser Rule on 8/28/24 with a compliance date of 1/1/26.  The investment adviser sector final rule seeks to “address the current uneven application of AML/CFT requirements across the investment adviser sector, which creates illicit finance risk and allows both legitimate and illicit investors to “shop around” for an adviser who does not need to apply AML/CFT controls, such as inquiring into the investor’s source of wealth.”  FinCEN’s view is that investment advisers are at risk of abuse by money launderers, corrupt officials, tax evaders and other bad actors due to the fact that investment advisers are “generally” not subject to comprehensive anti-money laundering and countering the financing of terrorism (AML/CFT) measures.  As a result, the illicit actors are likely to shop around for investment advisers that do not need to inquire about the illicit actors source of wealth and act as entry points to the U.S. securities, real estate, and other assets markets. FinCEN is delegating  its examination authority for the requirements of the Final Investment Adviser Rule to the SEC.

The Final Investment Adviser Rule would bring the U.S. in line with international counterparts and address deficiencies noted by the Financial Action Task Force (FATF)

FinCEN states that: “The rule would also help bring the United States into full compliance with several international AML/CFT standards established by the Financial Action Task Force (FATF). In the 2016 FATF Mutual Evaluation Report (MER) of the United States, the United States was rated (and remains rated) “partially compliant” on nine of the 40 FATF Recommendations. These included partially compliant ratings on Recommendations 1, 12, and 20 for the failure to apply AML/CFT requirements to investment advisers, among other reasons”.

The FATF is an independent inter-governmental entity that develops policies for protection of our global financial system from money laundering, terrorist financing and financing of weapons of mass destruction. It is considered to be the global money laundering and terrorist financing “watchdog” and more than 200 countries and jurisdictions are committed to following the FATF Recommendations/Standards. Its Recommendations (a total of 40) are considered to be a gold “Standard” for AML/CFT.

The final rule adds “investment adviser” to the definition of “financial institution” under the BSA’s implementing regulations, and, with certain exclusions noted below, defines investment advisers as:

• investment advisers registered with or required to register with the SEC, also known as registered investment advisers (RIAs), and
• investment advisers that report information to the SEC as exempt reporting advisers (ERAs).

The final rule requires RIAs and ERAs to: 

• implement a risk-based and reasonably designed AML/CFT program;
• file certain reports, such as Suspicious Activity Reports (SARs), with FinCEN;
• keep certain records, such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rules); and
• fulfill certain other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations, such as special information sharing procedures.

Investment advisers that are covered by the Final Investment Adviser rule ought to start preparing to mee the compliance requirements by 1/1/26.

Will you be ready?

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