FinCEN’s latest proposal to tighten AML regulations for SEC-registered advisers

The Financial Crimes Enforcement Network (FinCEN) took a significant step towards strengthening the financial regulatory framework in the US.

In a recent post by ACA Group, the firm recently outlined how AML obligations may be coming for investment advisers.

The agency published a proposal in the Federal Register aimed at setting a federal standard for anti-money laundering (AML) and combating the financing of terrorism (CFT) programs. This new regulation targets U.S. Securities and Exchange Commission (SEC)-registered investment advisers (RIAs) as well as exempt reporting advisers (ERAs).

A startling revelation came from a recent study conducted by the Treasury Department. It uncovered that over a span of nine years, more than 15% of RIAs and ERAs were either associated with or mentioned in at least one Suspicious Activity Report (SAR). This finding underscores the critical need for the proposed AML and CFT obligations for investment advisers, marking a significant move in the ongoing battle against financial crime.

Since the initial proposal back in 2015, the regulatory landscape for financial institutions has evolved considerably. The enactment of the FinCEN Customer Due Diligence Rule (CDD Rule) in 2016, coupled with the recent introduction of the Corporate Transparency Act in 2024, reflects FinCEN’s dedication to establishing a robust regulatory framework. The current proposal aims to mandate AML programs for investment advisers, extending FinCEN’s regulatory reach and aligning the requirements for advisers more closely with those for banks and broker-dealers.

Under the proposed rule, investment advisers would be required to implement comprehensive AML/CFT programs. These programs must include the development of risk-based policies, procedures, and internal controls, the appointment of a dedicated AML/CFT compliance officer, ongoing employee training, and an independent testing function to evaluate the effectiveness of the AML/CFT program. Additionally, advisers would be obligated to file SARs and maintain records in compliance with FinCEN’s Recordkeeping and Travel rules, among other duties.

It’s important to note that mutual funds, already subject to AML/CFT obligations, would not face new requirements under this proposal. However, the proposal does plan to integrate aspects of the CDD rule, such as understanding customer relationship purposes and conducting ongoing monitoring, but stops short of imposing Customer Identification Programs (CIPs) and beneficial ownership information collection at this stage.

FinCEN has proposed that the SEC, with its expertise in examining RIAs and ERAs, should oversee compliance with these new rules. This strategy aims to streamline the examination process by leveraging the SEC’s existing framework, thereby expanding its scope without introducing new regulatory bodies.

This proposal represents a significant effort to enhance the integrity of the financial system by imposing stricter AML and CFT standards on investment advisers. As FinCEN continues to adapt its regulatory strategies to the evolving financial landscape, the industry awaits further developments with keen interest.

Read the full post here.

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