WHAT HAPPENED?

On August 28, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a final rule (the “Final Rule”) that subjects certain registered investment advisers (“RIAs”) and exempt reporting advisers (“ERAs”) to anti-money laundering and countering the financing of terrorism (“AML/CFT”) requirements. These requirements largely mirror the requirements applicable to other financial institutions.

WHO DOES THE FINAL RULE COVER?

“Covered Advisers” includes all RIAs and ERAs, except RIAs that are:

• Not required to report any assets under management to the SEC on Form ADV;
• Registered as “mid-sized advisory firms” (i.e., an RIA with regulatory assets under management of $25-$100 million that are not subject to a state’s registration and examination regime);
• Registered solely as pension consultants; or
• Registered solely as “multi-state advisers”.

DOES THAT INCLUDE FOREIGN ADVISERS?

Yes, with limitations. RIAs or ERAs that have a principal office and place of business outside the United States (“foreign-located investment advisers”) are Covered Advisers only with respect to their advisory activities that:

• Take place within the United States, including through the involvement of U.S. personnel of the investment adviser; or
• Provide advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person.

ARE THERE ANY OTHER COVERED ADVISERS?

No. State-registered advisers, foreign private advisers and family offices will not be subject to the Final Rule.

WHEN DOES THE FINAL RULE TAKE EFFECT?

Covered Advisers will be required to comply with the Final Rule beginning on January 1, 2026.

WHAT MUST COVERED ADVISERS DO TO COMPLY?

Covered Advisers must implement a risk-based and reasonably designed AML/CFT program (“AML Program”) that includes written policies, procedures, and internal controls and requires the appointment of an AML Compliance Officer.¹

Covered Advisers must also:

• File Suspicious Activity Reports (“SARs”) with FinCEN for any suspicious transaction relevant to a possible violation of law or regulation;
• File Currency Transaction Reports (“CTRs”) with FinCEN for certain deposits, withdrawals, exchanges of currency or other payments or transfers, by, through, or to the Covered Adviser which involves a transaction in currency of more than $10,000;
• Create and retain records for transmittals of funds of $3,000 or more in compliance with the “Recordkeeping Rule” and “Travel Rule”;
• Satisfy special due diligence requirements to detect and report any known or suspected money laundering or suspicious activity conducted through or involving correspondent and private banking accounts; and
• Comply with special measures under Section 311 of the PATRIOT Act.

Further, Covered Advisers must conduct a risk assessment and independent testing of their AML Program and will be required to share certain additional information with FinCEN, law enforcement, and other financial institutions as required by Section 314 of the PATRIOT Act.

As in the proposed rule, the Final Rule does not require Covered Advisers to implement a customer identification program (“CIP”) or require the collection of beneficial ownership information (“BOI”) for legal entity customers. However, the CIP requirement is being addressed through separate FinCEN/SEC joint rulemaking, which we expect to be adopted in the near future.²

MAY COVERED ADVISERS OUTSOURCE THEIR OBLIGATIONS?

In general, a Covered Adviser may delegate the implementation and operation of certain aspects of its AML Program to a third party or outside consultant (such as a fund administrator) with the following limitations:

• The AML Compliance Officer must be an employee of the Covered Adviser or an affiliate.
• The delegation must be subject to contractual agreements and a risk-based approach to oversight.
• The Covered Adviser will remain responsible for overall implementation and must ensure that FinCEN and the SEC are able to obtain information and records relating to the AML Program.

WHO WILL EXAMINE COVERED ADVISERS FOR COMPLIANCE?

The SEC. Based on past experience, we expect that the SEC may begin exploring issues related to AML/CFT and the Final Rule’s requirements in the exam setting in advance of the effective date of the Final Rule.

ANY OTHER OBSERVATIONS?

We expect Covered Advisers will need to significantly revise their policies, procedures and practices. We further expect many Covered Advisers will explore outsourcing certain requirements to third-party service providers. In the coming months, Seward & Kissel LLP will be providing additional analysis of the Final Rule and its implications for Covered Advisers, in particular when FinCEN and the SEC adopt CIP requirements for Covered Advisers.