On August 28, 2024, the Financial Crimes Enforcement Network (FinCEN) adopted a final rule (Final Rule) that adds registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to the definition of “financial institution” under the Bank Secrecy Act, thereby extending certain anti-money laundering/countering the financing of terrorism (AML/CFT) program requirements to these advisers. The Final Rule was adopted substantially as proposed in February 2024, however, the Final Rule clarifies the scope of the Rule. The Final Rule is effective, and compliance with the Rule is required by, January 1, 2026.
The Final Rule requires certain RIAs and ERAs to develop and implement a written AML/CFT program that is risk-based and reasonably designed to prevent the adviser from being used for money laundering, terrorist financing or other illicit finance activities. The AML/CFT program must:
- designate one or more AML compliance officers, who should be an officer of the adviser (or individual with similar authority);
- institute an ongoing employee training program;
- require independent testing of the effectiveness of the program; and
- implement risk-based procedures for conducting ongoing customer due diligence to (1) understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and (2) identify and report suspicious transactions (suspicious activity reporting) and, on a risk basis, to maintain and update customer information.
In a change from the proposed rule, FinCEN narrowed the definition of “investment adviser” to exclude RIAs that register with the SEC solely because they are mid-sized advisers, multi-state advisers or pension consultants, as well as RIAs that do not report any assets under management on Form ADV. In addition, the Final Rule clarifies that for investment advisers with a principal office and place of business outside the United States, only activities that take place within the United States (including activities involving the adviser’s U.S. personnel) or that provide services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person are subject to the Rule.
The Final Rule permits advisers to exclude bank- and trust company-sponsored collective investment funds from the AML/CFT program requirements, and similarly permits the exclusion of mutual funds without obligating the adviser to verify that the mutual fund has implemented an AML/CFT program.
Consistent with the proposed rule, the Final Rule permits advisers to delegate contractually the implementation and operation of certain aspects of its AML/CFT program, however, the adviser remains fully responsible and legally liable for the program’s compliance with the AML/CFT requirements. FinCEN has delegated its examination authority with respect to AML/CFT requirements to the SEC given the SEC’s expertise in the regulation of investment advisers and the existing delegation to the SEC of authority to examine broker-dealers and certain investment companies for AML/CFT compliance.
The adopting release is available here.
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