New AML Regulations Proposed for Certain Investment Advisers

Investment Management Update

Date: October 22, 2015

Key Notes:

Proposed FinCEN rules would:

  • Require investment advisers to establish AML programs with certain minimum standards
  • Require investment advisers to report suspicious activities to FinCEN
  • Subject investment advisers to certain reporting and recordkeeping requirements

The Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, has proposed rules that would:

  • Prescribe minimum standards for anti-money laundering (AML) programs to be established by certain investment advisers
  • Require such investment advisers to report suspicious activities to FinCEN under the Bank Secrecy Act (BSA)
  • Include investment advisers required to register with the U.S. Securities and Exchange Commission (SEC) in the definition of “financial institutions” under BSA regulations, subjecting such investment advisers to an array of reporting and recordkeeping requirements

The FinCEN proposal does not include a customer identification program requirement. As proposed, the rules would apply to investment advisers that are required to register with the SEC,[1] and FinCEN would delegate its authority to examine investment advisers’ compliance to the SEC.

AML Program

The proposed rules would require each SEC-registered investment adviser to develop and implement a written AML program 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 be approved by the investment adviser’s board of directors, or if the investment adviser does not have a board, by its sole proprietor, general partner, trustee or other persons who have functions similar to a board of directors. Each investment adviser would also be required to make its AML program available to FinCEN or the SEC upon request.

The proposal establishes four minimum requirements for an AML program, which must be established within six months of final rules becoming effective. The proposed requirements are risk-based and intended to give investment advisers the flexibility to design their programs to address the specific risks of the advisory services they provide and the clients they advise. Therefore, larger firms would be expected to employ more complex programs. However, each firm must conduct its own risk-based assessment. The requirements for an AML program are:

  • Establish and implement policies, procedures and internal controls
  • Provide for independent testing for compliance (conducted by the investment adviser’s personnel or a qualified third party)
  • Designate an AML compliance officer or committee
  • Provide ongoing training for appropriate persons

FinCEN is also proposing to include investment advisers on the list of financial institutions, such as broker-dealers and investment companies, that the SEC has the authority to examine for compliance with FinCEN’s rules.

Suspicious Activity Reports

The proposed rules also would obligate investment advisers to report to FinCEN suspicious transactions that involve at least $5,000 in funds or other assets in a suspicious activity report (SAR). Under the proposed rules, an investment 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):

  • Involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity
  • Is designed, whether through structuring or other means, to evade the BSA’s requirements
  • Has no business or apparent lawful purpose, and the investment adviser knows of no reasonable explanation for the transaction after examining the available facts
  • Involves the use of the investment adviser to facilitate criminal activity[2]

There are also provisions that permit an investment adviser to voluntarily report other transactions. Because confidentiality is a concern, the rules also address when a SAR can be shared within an organization or with an affiliate.

The determination of whether a SAR must be filed should be based on all facts and circumstances relating to the transaction and the client in question. FinCEN recognizes that different types of clients and transactions will require different judgments, and therefore the proposing release outlines several “red flags” to provide guidance to investment advisers.

Consequences of Being a Financial Institution

The proposed rules are intended to treat investment advisers similarly to banks, securities brokers-dealers, futures commission merchants, introducing commodities brokers and mutual funds under the Recordkeeping and Travel Rules.[3] Currently, investment advisers are not required to comply with Currency Transaction Report (CTR) filing requirements or the recordkeeping, record transmittal and retention requirements for funds transmittal under the Recordkeeping and Travel Rules and other related recordkeeping requirements. Including investment advisers in the definition of “financial institutions,” as proposed, would require investment advisers to comply with all BSA regulatory requirements generally applicable to financial institutions, including these requirements and information-sharing requests pursuant to Section 314(a) of the USA PATRIOT Act. In addition, affected investment advisers would be required to file CTRs, replacing their current obligation to file reports on Form 8300, for the receipt of more than $10,000 in cash and negotiable instruments. The proposed rules would also require investment advisers to create and retain records for extensions of credit and cross-border transfers of currency, monetary instruments, checks, investment securities and credit in amounts exceeding $10,000.

Prior Proposals

FinCEN previously proposed two complementary rules in 2002 and 2003 that would have required certain investment advisers, unregistered investment companies and commodity trading advisers to establish AML programs. The prior proposals were withdrawn, due in part to other proposed changes to the regulatory landscape, and as a result, investment advisers have not been required to establish AML policies or procedures. Since that time, regulatory changes for investment advisers have been implemented under the Dodd-Frank Act requiring that certain advisers to private funds register with the SEC. FinCEN notes the prior two-pronged approach it proposed is no longer necessary and it is instead issuing this singular proposal for all investment advisers required to register with the SEC.

The proposing release concludes that investment advisers would be able to adapt existing policies, procedures and internal controls to comply with FinCEN’s proposed rules. Furthermore, it notes that many investment advisers have either voluntarily developed and maintained AML programs to satisfy certain clients, counterparties or affiliates with whom they do business, or have implemented AML programs in conjunction with SEC no-action letters permitting securities broker-dealers to rely on registered investment advisers to perform certain aspects of their customer identification program obligations.


For more information, please contact:

Cassandra W. Borchers

Andrew J. Davalla

Donald S. Mendelsohn

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.


[1] The current proposal does not extend to exempt reporting advisers, but the proposing release notes that future rulemaking may include state registered or exempt reporting advisers.

[2] See 31 CFR 1031.320(a)(2)(i)-(iv).

[3] See 31 CFR 1010.410 and 1010.430. The recordkeeping, record transmittal and retention requirements for the transmittal of funds for non-bank financial institutions under 31 CFR 1010.410 are often referred to as the “Recordkeeping and Travel Rules.” Financial institutions are also required to retain records for five years. See CFR 1010.430(d).