Key Points

  • On February 13, 2024, FinCEN issued an NPRM that seeks to include certain investment advisers in the definition of “financial institution” under the BSA.
  • As described in the NPRM as well as in FinCEN's fact sheet, RIAs and ERAs would be required to implement risk-based AML/CFT programs, file SARs with FinCEN, fulfill certain recordkeeping requirements and fulfill other obligations currently applicable to financial institutions subject to the BSA and FinCEN's implementing regulations.
  • There is a 60-day public comment period for the NPRM (i.e., comments will be accepted until April 15, 2024 on

Issuance of Proposed Rule

In an effort to address increasing “illicit finance risks in the investment adviser industry,” the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) in its notice of proposed rulemaking (NPRM) proposes to
(1) include Registered Investment Advisers (RIAs) and Exempt Reporting Advisers (ERAs) in the definition of “financial institution” under the Bank Secrecy Act (BSA) and (2) require these RIAs and ERAs to:

  • Establish risk-based anti-money laundering/countering the financing of terrorism (AML/CFT) programs, including:
    • Developing internal policies, procedures, and controls to comply with the requirements of the BSA and address money laundering, terrorist financing and other illicit finance risks.
    • Designating an AML/CFT compliance officer.
    • Instituting an ongoing employee training program.
    • Soliciting an independent test of AML/CFT programs for compliance.
    • Implementing risk-based procedures for conducting ongoing customer due diligence.
  • File suspicious activity reports (SARs) and Currency Transaction Reports (CTRs) with FinCEN.
  • Maintain records relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule under the BSA).

According to the NPRM, these proposed regulations “will apply to investment advisers that may be at risk for misuse by money launderers, terrorist financers, or other actors who seek access to the U.S. financial system for illicit purposes via investment advisers and threaten U.S. national security.”

While most investment advisers are subject to certain reporting requirements, according to FinCEN, these requirements are not designed to address money laundering, terrorist financing and other illicit financial activities. As a result, according to FinCEN, AML/CFT measures are “not uniform” across the industry, and this “patchwork” of AML/CFT obligations can create opportunities for illicit actors to access the U.S. financial system.

FinCEN noted in the NPRM that according to a U.S. government review, the number of SAR filings associated with an RIA or ERA “increased by approximately 400 percent between 2013 and 2021,” which FinCEN indicated was “disproportionately higher increase than the overall increase in SAR filings, which was approximately 140 percent.” FinCEN also describes other apparent illicit finance risks associated with investment advisers, such as reliance on non-U.S. administrators for investor due diligence and identity verification, and the use of multiple legal entities for cross-border investment structures, including nominee arrangements.

In addition to the above, the NPRM proposes to implement information-sharing provisions between and among FinCEN, law enforcement agencies and certain financial institutions, and to implement special due diligence requirements for correspondent and private banking accounts. These programs would be subject to examination by FinCEN, but FinCEN is proposing to delegate its examination authority to the SEC.

Notably, the NPRM does not require RIAs and ERAs to implement a customer identification program (CIP) or collect beneficial ownership information. FinCEN anticipates a future joint rulemaking with the SEC to address these issues.

If the proposed rule is finalized, RIAs and ERAs would have 12 months to develop and implement a risk-based AML/CFT program that complies with the requirements in the rule.

FinCEN previously attempted to address this perceived risk in 2002, 2003, 2007 and in 2015, FinCEN published an NPRM that would have included RIAs (but not ERAs) within the definition of “financial institution,” under the BSA.

Investment Adviser Risk Assessment

Concurrent with the NPRM, the Treasury Department issued its 2024 Investment Adviser Risk Assessment (the Report). The Report explains that “several illicit finance threats involving investment advisers” have been identified, including that investment advisors have served as an entry point into the U.S. market for illicit proceeds associated with corruption, fraud and tax evasion and that foreign states, notably China and Russia, are using investment advisers to “access certain technologies and services with long-term national security implications through investments in early-stage companies.”

Next Steps and Recommendations

FinCEN seeks comments on the NPRM, including on specific questions relating to the proposed definition of investment adviser, the AML/CFT program requirement and the application of the Recordkeeping, Travel Rule and CTR requirements. Comments may be submitted on (Docket Number FINCEN-2024-0006 and RIN 1506-AB58) until April 15, 2024.

While previous efforts by FinCEN to impose mandatory AML/CFT requirements on investment advisers have failed, RIAs and ERAs should nevertheless assess their current AML/CFT programs to identify any enhancements that may be needed in light of the NPRM. Given geopolitical trends since the last NPRM in 2015, including the recent U.S. government focus on facilitators of Russia's war with Ukraine and China's investments in advanced technology, among other areas, there may be a greater appetite for this version to proceed through the rulemaking process.

Akin will be offering more insights about the NPRM in the coming days.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.