Locke Lord QuickStudy: FinCEN Proposes BSA/AML Rules for Investment Advisers (Again)

Locke Lord LLP
August 26, 2015

On Tuesday, August 25, 2015, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department, issued a notice of proposed rulemaking that would bring certain investment advisers under the umbrella of FinCEN’s Bank Secrecy Act (BSA) and anti-money laundering (AML) regulations. This proposal is significant for the asset management industry, but it is not the first time FinCEN has proposed the imposition of AML rules on investment advisers. Indeed, industry veterans will recall the proposed rulemakings in 2002 and 2003 that, if finalized, would have imposed AML regulations on certain unregistered investment companies and registered investment advisers, respectively. However, these rules were never finalized and were withdrawn in 2008 as FinCEN considered a wholesale review of the AML regulatory framework. 

The current proposal will cover substantially the same spectrum of entities as both 2002 and 2003 proposals. This is due largely to changes made by the Dodd-Frank Wall Street Reform and Consumer Protection Act to the Investment Advisers Act of 1940, which required formerly unregistered advisers to hedge funds, private equity and other private funds to register with the Securities and Exchange Commission (SEC). 

As proposed, the rules do three things. First, the rules amend the definition of “financial institution” to include investment advisers, and add a definition of “investment adviser,” which amounts to an SEC-registered investment adviser. Second, the rules require such investment advisers to establish AML programs akin to what is required of banks, broker-dealers, insurance companies and other financial institutions. Finally, such investment advisers would be required to report suspicious activity to FinCEN pursuant to the BSA. 

Outlined within the proposal is the justification for imposing BSA/AML program, reporting, recordkeeping and information sharing requirements, as well as a discussion of the requirements themselves. Such requirements include establishing a written AML program that includes, at a minimum, the four pillars of an AML program – (1) internal policies, procedures and controls; (2) designation of a compliance officer; (3) ongoing employee training and (4) independent testing. Additionally, covered investment advisers would be required to file suspicious activity reports (SARs), Currency Transaction Reports (CTRs) and to keep certain records related to the transmittal of funds.

As with the AML programs established by other financial institutions, an investment adviser’s AML program must be “reasonably designed to prevent the investment adviser from being used to facilitate money laundering or the financing of terrorist activities and to achieve and monitor compliance with the applicable provisions of the BSA and FinCEN’s implementing regulations.” The AML program must also be approved in writing by the board of directors, trustees or similar authority of the investment adviser. 

Locke Lord has a dedicated team of financial services regulatory, compliance and litigation attorneys with significant experience handling various aspects of banking and finance, including BSA and AML program compliance. Locke Lord attorneys regularly advise financial institutions on regulatory compliance matters, new product development and represent clients in regulatory enforcement matters, class actions and various lawsuits in the U.S. and abroad. Visit Locke Lord’s Financial Services Regulatory Practice Group website or contact the author with questions.