AML Regulations for Registered Investment Advisers

On 25 August 2015, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, proposed new rules (the Proposed Rules), requiring “certain” registered investment advisers (those registered with the United States Securities and Exchange Commission (SEC)) to establish anti-money laundering (AML) programs and to report suspicious activities to FinCen pursuant to the Bank Secrecy Act (BSA). The Proposed Rules would apply to all advisers registered with the SEC, including those registered advisers located outside of the United States. The Proposed Rules would make three primary regulatory changes:

  1. include investment advisers (as defined in the Proposed Rules) within the general definition of “financial institution” in the regulations implementing the BSA;
  2. require investment advisers to establish AML programs; and
  3. require investment advisers to report suspicious activity.

The Proposed Rules require registered investment advisers (“advisers”) “to develop and implement a written AML program reasonably designed to prevent the adviser from being used to facilitate money laundering or the financing of terrorist activities and achieve and monitor compliance with the applicable provisions of the Bank Secrecy Act… and the implementing regulations thereunder.” Advisers must develop and implement an AML program that complies with the requirements within six months from the effective date of the regulation.

Furthermore, the AML program must be approved in writing by the adviser’s board of directors (or similar body), and an adviser would be required to make its AML program available to FinCEN and the SEC upon request.

The mandate to adopt an AML program is not a “one size-fits-all” requirement. Instead, an adviser should take a risk-based approach and design its program to meet the specific risks of the advisory services it provides and the clients it advises. Under the Proposed Rules, the four minimum requirements for an AML Program are:

  1. Establish and implement policies, procedures and internal controls.
  2. Provide for independent testing for compliance to be conducted by Adviser personnel or by a qualified outside party.
  3. Designate a person responsible for implementing and monitoring the operations and internal controls of the program.
  4. Provide ongoing training for appropriate persons.

Finally, the proposed rule would expand the general definition of “financial institution” to include registered investment advisers, thus subjecting such advisers to the requirements of the BSA. These requirements include the filing of currency transaction reports and retention of records relating to funds transmittals. Specifically, advisers would be required to comply with the following:

  1. Currency Transaction Report (CTR) filing requirements which would require advisers to file a CTR for transactions involving the transfer of more than $10,000 in currency by, through, or to the adviser.
  2. Recordkeeping and Travel Rules under which financial institutions must create and retain records for certain transmittals of funds and ensure that certain information pertaining to the transmittal of funds “travels” with the transmittal order through the payment chain.
  3. Information Sharing under the USA PATRIOT Act. Financial institutions are required to share information with the US government and allows FinCEN to require financial institutions to search their records for certain account related and transactional information as well as the ability to share information with other financial institutions under a safe harbor protecting the firm from liability, in order to better identify and report potential money laundering and terrorism activities.

The Proposed Rules would extend to advisers wholly outside the United States and is not limited to an adviser’s US clients. This extension may pose significant challenges for non-US advisers, as US AML rules may not be consistent with local requirements e.g. data protection. Exempt reporting advisers (ERAs) would not be covered by the proposed rules, as ERAs are neither registered nor required to register with the SEC.

The proposed rule was published 25 August 2015 and will be out for a 60-day comment period.

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