On February 13, 2024, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued a notice of proposed rulemaking (the “Proposed Rule”)¹ that would subject registered investment advisers (“RIAs”) and exempt reporting advisers (“ERAs” and collectively with RIAs, the “Covered Advisers”) to certain anti-money laundering and countering the financing of terrorism (“AML/CFT”) requirements.²  The Proposed Rule would impose AML/CFT requirements to Covered Advisers located both inside and outside the United States. The comment period for the Proposed Rule is open until April 15, 2024, after which FinCEN will review comments, prepare, and adopt a final rule. The effective date of any final rule would be 12 months after adoption.

The Proposed Rule would require Covered Advisers to, among other things:

• Establish a written AML/CFT compliance program (an “AML Program”) approved by the board of directors (or equivalent);
• Appoint an AML compliance officer;
• Conduct customer due diligence;
• File suspicious activity reports (“SARs”);
• Comply with the so-called “Recordkeeping Rule” and “Travel Rule”;
• Share certain information with FinCEN, law enforcement, and other financial institutions under Section 314 of the USA PATRIOT Act of 2011, as amended (the “PATRIOT Act”); and
• Implement special due diligence requirements for correspondent and private banking accounts and special measures under Section 311 of the PATRIOT Act.

Notably, the Proposed Rule would not require Covered Advisers to implement a customer identification program (“CIP”), under which banks and broker-dealers are required to collect and document certain identifying information about customers, nor would it require the collection of beneficial ownership information for legal entity customers. FinCEN proposes to delegate examination authority to the SEC.

A Covered Adviser may delegate many of its responsibilities under the Proposed Rule (for example, to a fund administrator). But delegation is not “reliance,” and a Covered Adviser would remain fully liable for compliance with the AML/CFT requirements.

Many Covered Advisers may already comply, formally or informally, on a voluntary basis with many requirements of the Proposed Rule. But all Covered Advisers will need to assess compliance gaps if the Proposed Rule is ultimately adopted as a final rule.

1. Coverage by Type of Fund Advised by a Covered Adviser

a. Mutual Funds

The Proposed Rule would not require Covered Advisers to implement an AML Program or file SARs with respect to providing advisory services to “mutual funds” (including exchange-traded funds (“ETFs”)) – defined as open-end investment companies registered with the SEC – because such funds are already defined as “financial institutions” under FinCEN regulations and the regulatory and practical relationship between those funds and their investment advisers. Nonetheless, the information sharing and special due diligence requirements would apply to Covered Advisers with respect to mutual funds and ETFs.

b. Registered Closed-End Funds

Unlike mutual funds, registered closed-end funds do not have an existing AML/CFT program or SAR requirement. Accordingly, Covered Advisers providing advisory services to registered closed-end funds are subject to all of the Proposed Rule’s requirements, including the requirements to implement an AML Program and file SARs.

c. Private Funds

All Covered Advisers providing advisory services to private funds are subject to the Proposed Rule’s requirements.

2. AML Program

a. Summary

Under the Proposed Rule, each Covered Adviser would be required to develop and implement a “risk-based” AML Program “reasonably designed to prevent the Covered Adviser from being used for money laundering, terrorist financing, or other illicit finance activities.” The AML Program would be required to cover all advisory and sub-advisory activities other than activities undertaken with respect to mutual funds, which have their own obligations under the BSA. Non-advisory services would not be covered by the Proposed Rule.

b. Required Elements

The required elements of the AML Program would include:

• • A risk assessment;
  • Written policies, procedures, and internal controls;
  • Appointment of an AML compliance officer;
  • Independent testing;Ongoing training; and
  • Customer due diligence (“CDD”).

i. Risk Assessment
The Proposed Rule would require a Covered Adviser to establish and implement policies, procedures, and internal controls tailored to the risks arising from, among other things, the types of advisory services it provides and the nature of the customers it advises. Covered Advisers would need to perform a risk assessment considering, among other things, the types of accounts offered (e.g., managed accounts), the types of customers opening such accounts, the geographic location of such customers, and the sources of wealth for customer assets.

FinCEN specifically noted that investment advisers could treat registered closed-end funds as lower risk for purposes of their AML/CFT programs. FinCEN also cautioned advisers to private funds or other unregistered pooled investment vehicles that AML/CFT risks are higher when the adviser is unable to obtain identifying information about the investors in a private fund.

ii. Policies, Procedures, and Internal Controls

A Covered Adviser’s AML Program must be in writing and designed to address the risks identified by the risk assessment. The AML Program must be approved in writing by the Covered Adviser’s board of directors or trustees. If a Covered Adviser does not have a board, then the program must be approved by the adviser’s sole proprietor, general partner, trustee, or other persons that have functions similar to a board of directors.

iii. Designation of AML Officer(s)

The Proposed Rule would require a Covered Adviser to designate an AML compliance officer responsible for the AML Program.³ The person must be qualified (though no formal certification or training is mandated) and have full responsibility and authority to develop and implement the AML Program. The AML compliance officer must have established channels of communication with senior management, sufficient independence and access to resources.

iv. Independent Testing

The Proposed Rule would require a Covered Adviser to provide for independent testing of the AML Program by the adviser’s personnel (if sufficiently independent) or a qualified outside party. Annual testing is not necessarily required unless the risk assessment dictates otherwise.

v. Ongoing Training

The Proposed Rule would require a Covered Adviser to provide for ongoing training of appropriate persons, including employees and certain service providers.

vi. Ongoing Customer Due Diligence (“CDD”)

The Proposed Rule would require a Covered Adviser to conduct initial and ongoing CDD to (i) develop a customer risk profile; and (ii) conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. Compliance with the CDD mandate would require a Covered Adviser to “know its customer,” i.e., understand the source of a customer’s funds, the jurisdiction in which they reside, their country of citizenship, and their status as a politically exposed person among other things. For legal entity customers, a Covered Adviser would need to consider the type of entity, the jurisdiction in which it is domiciled and located, and the statutory and regulatory regime of that jurisdiction.

3. Reporting Obligations

a. Suspicious Activities Reports

The Proposed Rule would require Covered Advisers to file SARs for any suspicious transaction relevant to a possible violation of law or regulation that involves at least $5,000 in funds or other assets. More specifically, a Covered Adviser would be required to report a transaction if it knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part):

• • Involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity as a part of a plan to violate or evade any Federal law;
  • Is designed, whether through structuring or other means, to evade the requirements of the BSA;
  • Has no business or apparent lawful purpose; or
  • Involves the use of the Covered Adviser to facilitate criminal activity.

A Covered Adviser would be required to file a SAR within 30 days of initial detection of any suspicious activity and maintain supporting documentation. For situations requiring immediate attention, such as suspected terrorist financing or ongoing money laundering schemes, Covered Advisers would be required to notify law enforcement immediately in addition to filing a SAR. SARs and related documentation must be maintained for a period of five years from the date of the filing.

In general, SARs and any information that would reveal the existence of a SAR are strictly confidential. Disclosure is only permissible in connection with (i) preparation of a joint SAR or (ii) certain employment references or termination notices.

b. Currency Transaction Reports

The Proposed Rule would require Covered Advisers to file CTRs for “each deposit, withdrawal, exchange of currency or other payment or transfer, by, through, or to such financial institution which involves a transaction in currency of more than $10,000,” unless subject to an applicable exemption. To avoid duplicative requirements, this CTR filing would replace the current joint FinCEN/Internal Revenue Service Form 8300.

4. “Recordkeeping Rule” and “Travel Rule”

The Proposed Rule would subject a Covered Adviser to FinCEN’s so-called “Recordkeeping Rule” and “Travel Rule.” Under these rules, a Covered Adviser would be required to create and retain records for transmittals of funds of $3,000 or more and ensure that certain information pertaining to the transmittal of funds “travels” with the transmittal to the next financial institution in the payment chain. With certain exceptions, “transmittal of funds” includes fund transfers processed by banks, as well as similar payments where one or more of the financial institutions processing the payment is not a bank. The Recordkeeping and Travel Rules require the transmittor’s financial institution to obtain and retain the name, address, and other information about the transmittor and the transaction. The Recordkeeping Rule also requires the recipient’s financial institution (and in certain instances, the transmittor’s financial institution) to obtain or retain identifying information on the recipient.

5. Information-Sharing Procedures

The Proposed Rule would expressly subject Covered Advisers to FinCEN’s rules implementing the special information sharing procedures to detect money laundering or terrorist activity of sections 314(a) and 314(b) of the PATRIOT Act. Under these rules, upon request from FinCEN or law enforcement, a Covered Adviser would have to search its records for specified information and report any such information to FinCEN.

6. Special Standards of Due Diligence

The Proposed Rule would subject a Covered Adviser to the PATRIOT Act’s requirement for financial institutions to adopt policies to detect and report any known or suspected money laundering or suspicious activity conducted through or involving correspondent or private banking accounts. Specifically, these standards would address relationships with high-net worth non-U.S. customers and foreign financial institutions that may be acting on behalf of higher-risk non-U.S. customers, when those relationships involve correspondent accounts for foreign financial institutions or private banking accounts.