[Federal Register Volume 80, Number 169 (Tuesday, September 1, 2015)]
[Proposed Rules]
[Pages 52680-52701]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-21318]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Chapter X

RIN 1506-AB10


Anti-Money Laundering Program and Suspicious Activity Report 
Filing Requirements for Registered Investment Advisers

AGENCY: Financial Crimes Enforcement Network, Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: Financial Crimes Enforcement Network (``FinCEN''), a bureau of 
the Department of the Treasury (``Treasury''), is issuing this notice 
of proposed rulemaking to prescribe minimum standards for anti-money 
laundering programs (``AML'') to be established by certain investment 
advisers and to require such investment advisers to report suspicious 
activity to FinCEN pursuant to the Bank Secrecy Act (``BSA''). FinCEN 
is taking this action to regulate investment advisers that may be at 
risk for attempts by money launderers or terrorist financers seeking 
access to the U.S. financial system through a financial institution 
type not required to maintain AML programs or file suspicious activity 
reports (``SARs''). The investment advisers FinCEN proposes to cover by 
these rules are those registered or required to be registered with the 
U.S. Securities and Exchange Commission (``SEC''). FinCEN is also 
proposing to include investment advisers in the general definition of 
``financial institution'' in rules implementing the BSA. Doing so would 
subject investment advisers to the BSA requirements generally 
applicable to financial institutions, including, for example, the 
requirements to file Currency Transaction Reports (``CTRs'') and to 
keep records relating to the transmittal of funds. Finally, FinCEN is 
proposing to delegate its authority to examine investment advisers for 
compliance with these requirements to the SEC.

DATES: Written comments on this notice of proposed rulemaking 
(``NPRM'') must be submitted on or before November 2, 2015.

ADDRESSES: You may submit comments, identified by Regulatory 
Identification Number (RIN) 1506-AB10, by any of the following methods:
     Federal E-rulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. Include 1506-AB10 in 
the submission. Refer to Docket Number FINCEN-2014-0003.
     Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include 1506-
AB10 in the body of the text. Please submit comments by one method 
only. All comments submitted in response to this NPRM will become a 
matter of public record. Therefore, you should submit only information 
that you wish to make publicly available.
     Inspection of comments: The public dockets for FinCEN can 
be found at Regulations.gov. Federal Register proposed and final rules 
published by FinCEN are searchable by docket number, RIN, or document 
title, among other things, and the docket number,

[[Page 52681]]

RIN, and title may be found at the beginning of the notice. FinCEN uses 
the electronic, Internet-accessible dockets at Regulations.gov as their 
complete, official-record docket; all hard copies of materials that 
should be in the docket, including public comments, are electronically 
scanned and placed in the docket. In general, FinCEN will make all 
comments publicly available by posting them on http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: The FinCEN Resource Center at (800) 
767-2825 or email [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

A. General Statutory Provisions

    FinCEN exercises regulatory functions primarily under the Currency 
and Financial Transactions Reporting Act of 1970, as amended by the USA 
PATRIOT Act and other legislation. This legislative framework is 
commonly referred to as the ``Bank Secrecy Act'' (``BSA'').\1\ The 
Secretary of the Treasury (``Secretary'') has delegated to the Director 
of FinCEN the authority to implement, administer, and enforce 
compliance with the BSA and associated regulations.\2\ Pursuant to this 
authority, FinCEN may issue regulations requiring financial 
institutions to keep records and file reports that ``have a high degree 
of usefulness in criminal, tax, or regulatory investigations or 
proceedings, or in the conduct of intelligence or counterintelligence 
activities, including analysis, to protect against international 
terrorism.'' \1\ Additionally, FinCEN is authorized to impose AML 
program and suspicious activity reporting requirements for financial 
institutions.\2\
---------------------------------------------------------------------------

    \1\ The BSA is codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, 
31 U.S.C. 5311-5314 and 5316-5332 and notes thereto, with 
implementing regulations at 31 CFR chapter X. See 31 CFR 
1010.100(e).
    \2\ Treasury Order 180-01 (Sept. 26, 2002).
    \1\ 31 U.S.C. 5311.
    \2\ 31 U.S.C. 5318(g) and (h).
---------------------------------------------------------------------------

    In this rulemaking, FinCEN is not proposing a customer 
identification program requirement or including within the AML program 
requirements provisions recently proposed with respect to AML program 
requirements for other financial institutions.\3\ FinCEN anticipates 
addressing both of these issues with respect to investment advisers, as 
well as other issues, such as the potential application of regulatory 
requirements consistent with Sections 311, 312, 313 and 319(b) of the 
USA PATRIOT Act,\4\ in subsequent rulemakings, with the issue of 
customer identification program requirements anticipated to be 
addressed via a joint rulemaking effort with the SEC.
---------------------------------------------------------------------------

    \3\ Customer Due Diligence Requirements for Financial 
Institutions, 79 FR 45151 (Aug. 4, 2014).
    \4\ Uniting and Strengthening America by Providing Appropriate 
Tools Required to Intercept and Obstruct Terrorism Act of 2001 
(``USA PATRIOT Act'') (Pub. L. 107-56).
---------------------------------------------------------------------------

B. Previous Rulemaking Efforts

    On May 5, 2003, FinCEN published a notice of proposed rulemaking in 
the Federal Register proposing to require certain investment advisers 
to establish AML programs (``First Proposed Investment Adviser 
Rule'').\5\ This followed FinCEN's published notice of proposed 
rulemaking issued on September 26, 2002, proposing that unregistered 
investment companies establish AML programs (``Proposed Unregistered 
Investment Companies Rule'').\6\ In June 2007, FinCEN announced that it 
would be taking a fresh look at how its regulatory framework was being 
implemented to ensure that it was being applied effectively and 
efficiently across the industries that the statute covers. In 
conjunction with this initiative, and given the amount of time that had 
elapsed since initial publication of the proposals, FinCEN determined 
that it would not proceed with BSA requirements for these entities 
without undertaking further public notice and comment process, and 
therefore withdrew the First Proposed Investment Adviser Rule and the 
Proposed Unregistered Investment Companies Rule (collectively, the 
``previous proposals'' or ``proposed but now-withdrawn rules'') on 
November 4, 2008.\7\ Since the previous proposals have been withdrawn, 
there have been significant changes in the regulatory framework for 
investment advisers with the passage of the Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act'').\8\
---------------------------------------------------------------------------

    \5\ See Anti-Money Laundering Programs for Investment Advisers, 
68 FR 23646 (May 5, 2003). The SEC regulates investment advisers 
under the Investment Advisers Act of 1940 (``Advisers Act'') and the 
rules adopted under that Act. See 15 U.S.C. 80b et seq. and 17 CFR 
part 275.
    \6\ See Anti-Money Laundering Programs for Unregistered 
Investment Companies, 67 FR 60617 (Sept. 26, 2002).
    \7\ See Withdrawal of the Notice of Proposed Rulemaking; Anti-
Money Laundering Programs for Unregistered Investment Companies, 73 
FR 65569 (Nov. 4, 2008); and Withdrawal of the Notice of Proposed 
Rulemaking; Anti-Money Laundering Programs for Investment Advisers, 
73 FR 65568 (Nov. 4, 2008).
    \8\ See Dodd Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

II. Money Laundering Risks and Investment Advisers

    As of June 2, 2014, there were 11,235 investment advisers 
registered with the SEC, reporting approximately $61.9 trillion in 
assets for their clients.\9\ Investment advisers provide advisory 
services to many different types of clients, including individuals, 
institutions, pension plans, corporations, trusts, foundations, mutual 
funds, private funds, and other pooled investment vehicles.\10\ Some of 
the advisory services that investment advisers provide include 
portfolio management, financial planning, and pension consulting. 
Advisory services can be provided on a discretionary or non-
discretionary basis.\11\ Investment advisers often work closely with 
their clients to formulate and implement their clients' investment 
decisions and strategies. Investment advisers may be organized in a 
variety of legal forms, including corporations, sole proprietorships, 
partnerships, or limited liability companies.\12\
---------------------------------------------------------------------------

    \9\ See Frequently Requested FOIA Document: Information About 
Registered Investment Advisers and Exempt Reporting Advisers, 
available at http://www.sec.gov/foia/docs/invafoia.htm.
    \10\ See Part 1A, Item 5 of Form ADV for a list of examples of 
different types of advisory clients. Form ADV is the uniform form 
used by investment advisers to register with both the Securities and 
Exchange Commission (SEC) and state securities authorities; it is 
available at http://www.sec.gov/divisions/investment/iard/iastuff.shtml.
    \11\ An adviser has discretionary authority or manages assets on 
a discretionary basis if it has the authority to decide which 
securities to purchase and sell for the client. An adviser also has 
discretionary authority if it has the authority to decide which 
investment advisers to retain on behalf of the client. See Glossary 
to Form ADV.
    \12\ See Part 1A, Item 3.A of Form ADV.
---------------------------------------------------------------------------

    As long as investment advisers are not subject to AML program and 
suspicious activity reporting requirements, money launderers may see 
them as a low-risk way to enter the U.S. financial system. It is true 
that advisers work with financial institutions that are already subject 
to BSA requirements, such as when executing trades through broker-
dealers to purchase or sell client securities, or when directing 
custodial banks to transfer assets. But such broker-dealers and banks 
may not have sufficient information to assess suspicious activity or 
money laundering risk. When an adviser orders a broker-dealer to 
execute a trade on behalf of an adviser's client, the broker-dealer may 
not know the identity of the client. When a custodial bank holds assets 
for a private fund managed by an adviser, the custodial bank may not 
know the identities of the investors in the fund. Such gaps in 
knowledge make it possible for money launderers to evade

[[Page 52682]]

scrutiny more effectively by operating through investment advisers 
rather than through broker-dealers or banks directly.
    Money laundering is the processing of criminal proceeds through the 
financial system to disguise their illegal origin or the ownership or 
control of the assets, or promoting an illegal activity with illicit or 
legal source funds. Generally, money laundering involves three stages, 
known as placement,\13\ layering,\14\ and integration,\15\ and an 
investment adviser's operations are vulnerable at each stage. Money 
laundering is defined in part with respect to the proceeds of certain 
predicate crimes referred to as ``specified unlawful activities.'' \16\ 
Securities fraud is a specified unlawful activity. Both securities 
fraud and the act of laundering the proceeds of securities fraud are 
destructive to investors, individual businesses, and the financial 
system as a whole. The crime of money laundering also encompasses the 
movement of funds to finance terrorism, individual terrorists, or 
terrorist organizations. These funds may be from illegitimate or 
legitimate sources.\17\
---------------------------------------------------------------------------

    \13\ At the ``placement'' stage, proceeds from illegal activity 
or funds intended to promote illegal activity are first introduced 
into the financial system. For example, this could occur in the 
investment advisory business when a money launderer tries to fund an 
investment advisory account with cash or cash equivalents derived 
from illegal activity. Money launderers also may approach investment 
advisers seeking to obtain the adviser's assistance as an 
intermediary in placing funds into custodial accounts.
    \14\ The ``layering'' stage involves the distancing of illegal 
proceeds from their criminal source through a series of financial 
transactions to obfuscate and complicate their traceability. A money 
launderer could place assets under management with an investment 
adviser as one of many transactions in an ongoing layering scheme. 
Layering may involve establishing an advisory account in the name of 
a fictitious corporation or an entity designed to break the link 
between the assets and the true owner. A money launderer also may 
place assets under management with an adviser and then shortly 
thereafter arrange for their removal.
    \15\ ``Integration'' occurs when illegal proceeds previously 
placed into the financial system are made to appear to have been 
derived from a legitimate source. For example, once illicit funds 
have been invested with an investment advisor, the proceeds from 
those investments may appear legitimate to any financial institution 
thereafter receiving such proceeds.
    \16\ See 18 U.S.C. 1956(c)(7).
    \17\ See 18 U.S.C. 1956, 2339A, and 2339B.
---------------------------------------------------------------------------

    In addition to offering services that could provide money 
launderers, terrorist financers, and other illicit actors the 
opportunity to access the financial system, investment advisers may be 
uniquely situated to appreciate a broader understanding of their 
clients' movement of funds through the financial system because of the 
types of advisory activities in which they engage. If a client's 
advisory funds include the proceeds of money laundering, terrorist 
financing, and other illicit activities, or are intended to further 
such activities, an investment adviser's AML program and suspicious 
activity reporting may assist in detecting such activities. 
Accordingly, investment advisers have an important role to play in 
safeguarding the financial system against fraud, money laundering, 
terrorist financing, and other financial crime.

III. The Proposed and Withdrawn Rules for Investment Advisers and 
Unregistered Investment Companies

    In 2003, FinCEN published the First Proposed Investment Adviser 
Rule, which would have imposed on certain investment advisers a 
requirement to establish and implement AML programs. Prior to that, in 
2002, FinCEN issued the Proposed Unregistered Investment Companies 
Rule. We mention the Proposed Unregistered Investment Companies Rule in 
the context of this rulemaking because it is FinCEN's belief that most 
of the issuers captured in that proposed-but-now-withdrawn rule would 
be included in the AML programs of investment advisers covered by this 
proposed rule. The previous proposals were limited to proposing AML 
program requirements only; they did not include additional proposed 
requirements to report suspicious activities to FinCEN.
    FinCEN received 26 comment letters in response to the First 
Proposed Investment Adviser Rule. Comments were received on all aspects 
of the proposed rulemaking, with a particular focus on the proposed 
definition of ``investment adviser,'' the scope of an adviser's AML 
program, and the ability of an adviser to outsource compliance to a 
third party. FinCEN received 34 comment letters in response to the 
Proposed Unregistered Investment Companies Rule, and, again, there was 
a particular focus on the proposed definition of ``unregistered 
investment company,'' the scope of an issuer's AML program, and the 
ability of an issuer to outsource compliance obligations to third 
parties. In developing this current proposal, FinCEN re-reviewed all 
previously submitted comments to the previous proposals and has taken 
them into consideration.

IV. Section-by-Section Analysis

    As discussed above, FinCEN previously proposed two complementary 
rules to address money laundering risks in the asset management 
industry. At the time the First Proposed Investment Adviser Rule and 
the Proposed Unregistered Investment Companies Rule were published by 
FinCEN, the regulatory landscape for investment advisers was 
significantly different than it is today. At the time of those 
proposals, asset management services provided by investment advisers 
were generally divided into two categories for regulatory purposes: (i) 
Registered advisers that managed assets for a variety of clients 
including mutual funds, individuals, pension plans, etc.; and (ii) 
unregistered private fund advisers that managed private funds and other 
pooled investment vehicles, like hedge and private equity funds. As a 
result of the Dodd-Frank Act amendments to the Investment Advisers Act 
of 1940 (``Advisers Act''), formerly unregistered advisers to hedge, 
private equity, and other private funds are now required to register 
with the SEC. Accordingly, FinCEN believes the two-pronged approach of 
the prior proposals is no longer necessary to address the money 
laundering and terrorist financing risks presented by SEC-registered 
investment adviser clients and the unregistered investment companies 
that are managed by such advisers.\18\ FinCEN, therefore, is proposing 
a single rule for SEC-registered investment advisers that will result 
in coverage substantially similar to what would have existed if the two 
previously proposed but now-withdrawn rules for investment advisers and 
unregistered investment companies had been adopted under the Investment 
Act before Dodd-Frank.
---------------------------------------------------------------------------

    \18\ The Proposed Unregistered Investment Companies Rule 
included in the proposed definition of ``unregistered investment 
company'' certain commodity pools. See Anti-Money Laundering 
Programs for Unregistered Investment Companies at 60618. For the 
purposes of the rules being proposed today, FinCEN is deferring on a 
discussion of such commodity pools.
---------------------------------------------------------------------------

A. Definitions

    The BSA does not expressly enumerate ``investment adviser'' among 
the entities defined as a financial institution under sections 
5312(a)(2) and (c)(1) of title 31 of the United States Code. In 
addition to those institutions listed, however, section 5312(a)(2)(Y) 
authorizes the Secretary to include additional types of businesses 
within the BSA definition of financial institution if the Secretary 
determines that they engage in any activity similar to, related to, or 
a substitute for, any of the listed businesses. Investment advisers 
work closely with, and provide services that are similar or related to 
services provided by, other businesses defined as financial 
institutions under

[[Page 52683]]

the BSA (``BSA-defined financial institutions'').
    Investment services offered by advisers may be similar or related 
to those offered by broker-dealers in securities, banks, or insurance 
companies, each of which are BSA-defined financial institutions, and 
similar or related securities or other financial products are used to 
implement those services. For instance, many investment advisers 
sponsor and provide advisory services to mutual funds and advise 
clients on the purchase or sale of mutual fund shares. Banks and 
broker-dealers also may provide recommendations on mutual fund shares 
and may sell them to their own clients or clients of investment 
advisers. Investment advisers may provide advice with respect to 
products such as annuities that are offered by insurance companies and 
broker-dealers in securities.\19\ Some investment advisers may offer 
asset management services that are similar to, and that may even 
compete directly with, the asset management services offered by certain 
banks through their trust departments. Advisers often have 
relationships with broker-dealers to direct the purchase or sale of 
client securities that are held at bank or broker-dealer custodians for 
their clients. The close interrelationship between investment advisers 
and other BSA-defined financial institutions is further demonstrated by 
the fact that they are often dually registered as a broker-dealer in 
securities or affiliated with each other.\20\ Accordingly, FinCEN 
considers investment advisers to engage in activities that are 
``similar to, related to, or a substitute for'' financial services that 
are provided by other BSA-defined financial institutions and, 
therefore, should be subject to the requirements of the BSA.
---------------------------------------------------------------------------

    \19\ See Securities and Exchange Commission, Annuities (Apr. 6, 
2011) available at http://www.sec.gov/answers/annuity.htm. Insurance 
companies that issue securities are regulated by the SEC, State 
securities commissioners, and State insurance commissioners.
    \20\ See Securities and Exchange Commission, Study on Investment 
Advisers and Broker Dealers as Required by Section 913 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Jan. 2011) at 
page 8 available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf.
---------------------------------------------------------------------------

    Based on this consideration and the money laundering risks 
described above, FinCEN is proposing three regulatory changes: (1) 
Including investment advisers within the general definition of 
``financial institution'' in the regulations implementing the BSA and 
adding a definition of investment adviser; (2) requiring investment 
advisers to establish AML programs; and (3) requiring investment 
advisers to report suspicious activity. These proposals are discussed 
in greater detail below.
1. Adding the Term ``Investment Adviser'' to General Definitions
    FinCEN is proposing to add a definition of ``investment adviser'' 
to section 1010.100(nnn). The proposed definition is ``[a]ny person who 
is registered or required to register with the SEC under section 203 of 
the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(a).'' The proposed 
definition relies on terms and definitions used in the Advisers Act and 
in the SEC's regulations implementing the Advisers Act to define 
investment advisers that would be subject to the proposed AML program, 
SAR, and general recordkeeping requirements of the BSA. The proposed 
definition would permit investment advisers to determine easily whether 
they are subject to the proposed rules. The proposed definition would 
include both primary advisers and subadvisers.\21\ While FinCEN is 
limiting today's proposed definition to investment advisers registered 
or required to be registered with the SEC, future rulemakings may 
include other types of investment advisers, such as state-regulated 
investment advisers or investment advisers that are exempt from SEC 
registration, that are found to present risks to the U.S. financial 
system of money laundering, terrorist financing, and other types of 
financial crimes.
---------------------------------------------------------------------------

    \21\ In the investment advisory industry, an adviser may act as 
the ``primary adviser'' or a ``subadviser.'' The Advisers Act does 
not distinguish between advisers and subadvisers; all are 
``investment advisers.'' See Exemptions for Advisers to Venture 
Capital Funds, Private Fund Advisers With Less Than $150 Million in 
Assets Under Management, and Foreign Private Advisers at note 504 
and accompanying text. Generally, the primary adviser contracts 
directly with the client and a subadviser has contractual privity 
with the primary adviser. With respect to such a shared client, an 
advisory contract may grant the primary adviser the discretionary 
authority to retain and dismiss a subadviser. Other advisory 
contracts may only permit the primary adviser to recommend a 
subadviser to such a client--the client retains the authority to 
hire or dismiss a subadviser.
---------------------------------------------------------------------------

2. Scope of an Investment Adviser Definition
    Generally, an investment adviser's assets under management 
determine whether an investment adviser is required to register or is 
prohibited from registering with the SEC.\22\ In implementing the Dodd-
Frank Act amendments to the Advisers Act, the SEC amended the 
instructions to Part 1A of Form ADV to further implement a uniform 
method for an investment adviser to calculate its assets under 
management in order to determine whether it is required to register or 
is prohibited from registering with the SEC.\23\ Generally, an 
investment adviser falls into one of three categories based on its 
regulatory assets under management, i.e., a large, mid-sized, or small 
adviser. The application of the proposed definition under 31 CFR 
1010.100(nnn) to these three categories of adviser is discussed in the 
following section. In view of the comment letters submitted in response 
to the First Proposed Investment Adviser Rule, this section also 
discusses the application of the proposed investment adviser definition 
to certain specific types of advisers and other related entities.\24\
---------------------------------------------------------------------------

    \22\ See Rules Implementing Amendments to the Investment 
Advisers Act of 1940 at 42955.
    \23\ See Instructions for Part 1A, Item 5.F of Form ADV. See 
also id.
    \24\ FinCEN notes that this discussion is not exhaustive and 
that there may be other types of investment advisers or entities 
that meet the definition being proposed today and, therefore, would 
be subject to today's proposed rule.
---------------------------------------------------------------------------

(a) Application of the Definition to Large, Mid-Sized, and Small 
Investment Advisers
    Generally, a large adviser has $100 million or more in regulatory 
assets under management, and is required to register with the SEC (and 
therefore included in the proposed definition) unless an exemption from 
SEC registration is available.\25\ FinCEN notes that large advisers 
would comprise the bulk of investment advisers that are included in the 
definition of investment adviser for purposes of the rules being 
proposed today.
---------------------------------------------------------------------------

    \25\ 17 CFR 275.203A-1(a)(1).
---------------------------------------------------------------------------

    Generally, a mid-sized adviser has $25 million or more but less 
than $100 million, and a small adviser has less than $25 million in 
regulatory assets under management and is regulated or required to be 
regulated as an investment adviser in the State where it maintains its 
principal office and place of business.\26\ Mid-sized and small 
advisers are generally prohibited from registering with the SEC and 
therefore are excluded from the proposed definition, unless an 
exemption from the prohibition on SEC registration is available.\27\ 
Mid-sized and small

[[Page 52684]]

advisers prohibited from registering with the SEC are generally subject 
to regulation by the States.
---------------------------------------------------------------------------

    \26\ See 15 U.S.C. 80b-3A(a)(1). Currently, only the State of 
Wyoming does not regulate investment advisers. A small adviser 
located in the State of Wyoming, therefore, is required to register 
with the SEC.
    \27\ See 15 U.S.C. 80b-3A(a)(2). A mid-sized adviser with its 
principal office and place of business in Wyoming is neither 
required to register with the State, nor ``subject to examination'' 
by the State securities authority and is, therefore, required to 
register with the SEC. Also, mid-sized advisers with their principal 
offices and places of business in New York would be required to 
register with the SEC because the State securities authority has not 
represented to the SEC that registered advisers are ``subject to 
examination'' in the State; therefore, such advisers must register 
with the SEC. A mid-sized adviser that is required to register in 
any other State is subject to examination by the State and thus 
would be prohibited from registering with the SEC. See 15 U.S.C. 
80b-3A(a)(2). See also Securities and Exchange Commission--Division 
of Investment Management, Frequently Asked Questions Regarding Mid-
Sized Advisers (Jun. 28, 2011) available at http://www.sec.gov/divisions/investment/midsizedadviserinfo.htm.
---------------------------------------------------------------------------

    In the rules being proposed today, FinCEN is limiting the scope of 
the investment adviser definition to those advisers that are registered 
or required to be registered with the SEC. Limiting the definition of 
investment adviser to SEC-registered advisers will align FinCEN's 
regulatory framework with Federal functional regulation and allow 
FinCEN to work with the SEC to develop consistent application and 
examination of the BSA to such advisers. FinCEN notes that Congress has 
decided that, as a threshold matter, the type of investment adviser 
that should be subject to Federal regulation is, generally, an adviser 
that has $100 million or more in assets under management.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 275.203A-1(a)(1).
---------------------------------------------------------------------------

    FinCEN recognizes that investment advisers that are at risk for 
abuse by money launderers, terrorist financers, and other illicit 
actors may not be limited to advisers that are registered, or required 
to be registered, with the SEC. FinCEN, therefore, may consider future 
rulemakings to expand the application of the BSA to include investment 
advisers that are not registered or required to be registered with the 
SEC.
(b) Application of the Investment Adviser Definition to Certain 
Specific Types of Advisers and Other Related Entities
    Investment advisers provide many types of advisory services and may 
be organized in a wide variety of legal forms. The proposed definition 
applies to persons registered or required to register with the SEC and 
therefore may include, among others, the following types of advisers:
     Dually-registered investment advisers, and advisers that 
are affiliated with or subsidiaries of entities required to establish 
AML programs;
     certain foreign investment advisers;
     investment advisers to registered investment companies;
     financial planners;
     pension consultants; and
     entities that provide only securities newsletters and/or 
research reports.
    FinCEN recognizes that the different types of investment advisers 
included within today's proposed definition may present varying degrees 
of money laundering and terrorist financing risks. FinCEN, therefore, 
anticipates that the burden of establishing an AML program would also 
correspondingly be reduced due to the risk-based nature of the program 
and the types of advisory services these entities provide.

B. Delegation of Examination Authority to the Securities and Exchange 
Commission

    FinCEN has overall authority for enforcement of compliance with its 
regulations, including coordination and direction of procedures and 
activities of all other agencies exercising delegated authority. FinCEN 
is proposing to amend section 1010.810 to include investment advisers 
within the list of financial institutions the SEC has the authority to 
examine for compliance with FinCEN's rules. Persons and entities 
meeting the definition of investment adviser being proposed today under 
31 CFR 1010.100(nnn) would fall under this provision. The SEC has 
expertise in the regulation of investment advisers. The SEC is the 
Federal functional regulator for certain investment advisers and, 
therefore, is responsible for examining investment advisers for 
compliance with the Advisers Act and the SEC rules promulgated under 
that Act. Moreover, FinCEN has delegated to the SEC examination 
authority for broker-dealers in securities and certain investment 
companies, which are BSA-defined financial institutions subject to 
FinCEN's regulations and for which the SEC is the Federal functional 
regulator.\29\ Accordingly, the SEC is in the best position to act as 
the designated examiner of investment advisers for compliance with the 
rules FinCEN is proposing today.
---------------------------------------------------------------------------

    \29\ See 31 CFR 1010.810(b)(6).
---------------------------------------------------------------------------

C. Investment Advisers Defined as Financial Institutions

    FinCEN is proposing to include investment advisers registered or 
required to be registered with the SEC within the general definition of 
``financial institution'' in the regulations implementing the BSA.\30\ 
The application of general BSA reporting and recordkeeping requirements 
to an entity depends upon whether the entity is included in the general 
definition of ``financial institution.'' \31\ To date, investment 
advisers have not been required to comply with Currency Transaction 
Report (CTR) filing requirements,\32\ and the recordkeeping, 
transmittal of records, and retention requirements for the transmittal 
of funds under the Recordkeeping and Travel Rules and other related 
recordkeeping requirements.\33\ Defining investment advisers as a 
financial institution under 31 CFR 1010.100(t) would require investment 
advisers to comply with all BSA regulatory requirements generally 
applicable to financial institutions, including these requirements and 
to comply with information sharing requests pursuant to section 314(a) 
of the USA PATRIOT Act.\34\
---------------------------------------------------------------------------

    \30\ See 31 CFR 1010.100(t).
    \31\ The general definition of ``financial institution'' at 31 
CFR 1010.100(t) is less inclusive than the definition in the BSA 
itself. See 31 U.S.C. 5312(a)(2). The general definition determines 
the scope of rules that require the filing of CTRs and the creation, 
retention, and transmittal of records or information on transmittals 
of funds and other specified transactions. See 31 CFR 1010.310; 31 
CFR 1010.311; 31 CFR 1010.312; 31 CFR 1010.313; 31 CFR 1010.314; 31 
CFR 1010.315; 31 CFR 1010.410; 31 CFR 1010.415; and 31 CFR 1010.430. 
Defining a business as a financial institution also could make the 
business ineligible for exemption from the requirement to file CTRs. 
See, e.g., 31 CFR 1020.315(e)(8).
    \32\ See infra Section IV.C.1.
    \33\ See 31 CFR 1010.410 and 1010.430. The recordkeeping, 
transmittal of records, 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.'' See infra Section IV.C.2.
    \34\ See 1010.520.
---------------------------------------------------------------------------

1. Investment Advisers' Obligation To File CTRs Replaces Obligation To 
File Form 8300
    Under FinCEN's regulations that apply to a broad range of 
commercial activity, investment advisers are currently required to file 
reports on Form 8300 for the receipt of more than $10,000 in cash and 
negotiable instruments.\35\ The rules being proposed today would 
replace this requirement with a requirement that investment advisers 
file CTRs pursuant to 31 CFR 1010.311.\36\ An investment adviser

[[Page 52685]]

would file a CTR for a transaction involving a transfer of more than 
$10,000 in currency by, through or to the investment adviser.\37\ The 
threshold in 31 CFR 1010.311 applies to transactions conducted during a 
single business day.\38\ A financial institution must treat multiple 
transactions as a single transaction if the financial institution has 
knowledge that the transactions are conducted by or on behalf of the 
same person.\39\
---------------------------------------------------------------------------

    \35\ 31 CFR 1010.330(a)(1)(i). ``Cash'' and ``negotiable 
instruments'' include cashier's checks, bank drafts, traveler's 
checks, and money orders in face amounts of $10,000 or less, if the 
instrument is received in a ``designated reporting transaction.'' 31 
CFR 1010.330(c)(1)(ii)(A). A ``designated reporting transaction'' is 
defined as the retail sale of a consumer durable, collectible, or 
travel or entertainment activity. 31 CFR 1010.330(c)(2). In 
addition, an investment adviser would need to treat the instruments 
as currency if the adviser knows that a customer is using the 
instruments to avoid the reporting of a transaction on Form 8300. 31 
CFR 1010.330(c)(1)(ii)(B).
    \36\ See 31 CFR 1010.330(a) (stating that section 1010.330 [the 
BSA provision requiring the filing of the Form 8300] ``does not 
apply to amounts received in a transaction reported under 31 U.S.C. 
5313 and 31 CFR 1010.311.'') To the extent an investment adviser 
conducts transactions other than in currency (as defined in section 
1010.100(m) for purposes of the CTR requirement), it would be exempt 
from reporting such transactions because the Form 8300 requirement 
does not apply.
    \37\ See 31 CFR 1010.311 and 31 CFR 1010.100(m) (currency is 
defined as the coin and paper of the United States or of any other 
country that is designated as legal tender and that circulates and 
is customarily used as a medium of exchange in a foreign country).
    \38\ See 31 CFR 1010.313(b). Financial institutions must file a 
CTR for a transaction or related transactions 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 during any one business 
day. Compare to the threshold requirement for the Form 8300 defining 
any transactions conducted between a payer (or its agent) and the 
recipient in a 24-hour period as related transactions. Transactions 
are considered related even if they occur over a period of more than 
24 hours if the recipient knows, or has reason to know, that each 
transaction is one of a series of connected transactions. See 31 CFR 
1010.330(b)(3).
    \39\ 31 CFR 1010.313(b).
---------------------------------------------------------------------------

    Because investment advisers would no longer be required to file 
Form 8300s, investment advisers would be freed from having to report 
applicable transactions involving certain negotiable instruments 
reportable on Form 8300 but not the CTR when the investment adviser 
suspects that the monetary instruments are being used to avoid the Form 
8300 being filed.\40\ Although FinCEN recognizes that there may be some 
potential for criminals to use negotiable instruments such as money 
orders to move illicit cash through the investment adviser, the volume 
of Form 8300s currently filed by investment advisers is relatively low 
when compared to the overall volume of transactions involving 
investment advisers.\41\ Because investment advisers rarely receive 
from or disburse to clients significant amounts of currency, FinCEN 
believes they are less likely to be used during the initial 
``placement'' stage of the money laundering process than other 
financial institutions. Moreover, since an investment adviser would be 
required to report suspicious transactions under the SAR rule being 
proposed today, the ability to report suspicious transactions on Form 
8300 would be redundant.\42\
---------------------------------------------------------------------------

    \40\ In determining whether to file a Form 8300, an investment 
adviser currently may need to treat instruments as currency if the 
adviser knows that a customer is using the instruments to avoid the 
reporting of a transaction on Form 8300. See 1010.330(c)(1)(ii)(B).
    \41\ A review of BSA data revealed that approximately 3,047 Form 
8300s were filed by all investment advisers, whether registered or 
unregistered, over the seven years beginning in 2008, which is a 
fraction of the millions of transactions investment advisers conduct 
yearly on behalf of their clients.
    \42\ Currently an investment adviser can report a suspicious 
transaction voluntarily by checking box 1(b) in the Form 8300. In 
addition to the requirement that an investment adviser report on a 
CTR, under the proposed rule, an investment adviser would also be 
required to file a SAR if a transaction exceeds the threshold 
amount.
---------------------------------------------------------------------------

2. The Recordkeeping and Travel Rules and Other Related Recordkeeping 
Requirements
    Including investment advisers in the general definition of 
financial institution would subject an investment adviser to the 
requirements of the Recordkeeping and Travel Rules and other related 
recordkeeping requirements. Under the Recordkeeping and Travel Rules, 
financial institutions must create and retain records for transmittals 
of funds, and ensure that certain information pertaining to the 
transmittal of funds ``travel'' with the transmittal to the next 
financial institution in the payment chain.\43\ Accordingly, the rules 
being proposed today would require compliance with 31 CFR 1031.410 
(cross referencing 31 CFR 1010.410) and 31 CFR 1031.430 (cross 
referencing 31 CFR 1010.430).
---------------------------------------------------------------------------

    \43\ See 31 CFR 1020.410(a) and 1010.410(f). Financial 
institutions are also required to retain records for five years. See 
31 CFR 1010.430(d).
---------------------------------------------------------------------------

    The Recordkeeping and Travel Rules apply to transmittals of funds 
that equal or exceed $3,000. A ``transmittal of funds'' includes funds 
transfers processed by banks, as well as similar payments where one or 
more of the financial institutions processing the payment (e.g., the 
transmittor's financial institution, an intermediary financial 
institution, or the recipient's financial institution) is not a 
bank.\44\ When a financial institution accepts and processes a payment 
sent by or to its customer, then the financial institution would be the 
``transmittor's financial institution'' or the ``recipient's financial 
institution,'' respectively. 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.\45\ The Recordkeeping and Travel Rules also require the 
recipient's financial institution (and in certain instances, the 
transmittor's financial institution) to obtain or retain identifying 
information on the recipient.\46\ The Recordkeeping and Travel Rules 
require that certain information obtained or retained ``travel'' with 
the transmittal order through the payment chain.\47\
---------------------------------------------------------------------------

    \44\ See 31 CFR 1010.100(f), (g), (w), (z), (aa), (ii), (jj), 
(pp), (qq), (ddd), (eee), (fff), and (ggg) for various definitions 
pertaining to a ``transmittal of funds and persons and institutions 
involved in the payment chain of a transmittal of funds.''
    \45\ See 31 CFR 1010.410(e)(1)(i) and (e)(2).
    \46\ See 31 CFR 1010.410(e)(3) (information that the recipient's 
financial institution must obtain or retain).
    \47\ See 31 CFR 1010.410(f) (information that must ``travel'' 
with the transmittal order); 31 CFR 1010.100(eee) (defining 
``transmittal order'').
---------------------------------------------------------------------------

    Under the proposed rule, investment advisers would fall within an 
existing exception that is designed to exclude from these requirements' 
coverage funds transfers or transmittals of funds in which certain 
categories of financial institutions are the transmittor, originator, 
recipient, or beneficiary.\48\ The proposed application of the 
exception to investment advisers is intended to provide advisers with 
treatment similar to that of banks, brokers or dealers in securities, 
futures commission merchants, introducing brokers in commodities, and 
mutual funds. Finally, the proposed amendment would subject investment 
advisers to requirements to create and retain records for extensions of 
credit and cross-border transfers of currency, monetary instruments, 
checks, investment securities, and credit.\49\ These requirements apply 
to transactions in amounts exceeding $10,000.\50\
---------------------------------------------------------------------------

    \48\ 31 CFR 1020.410(a)(6) and 31 CFR 1010.410(e)(6).
    \49\ See 31 CFR 1010.410(a) through (c). Financial institutions 
must retain these records for a period of five years. 31 CFR 
1010.430(d).
    \50\ See 31 CFR 1010.410(a) through (c).
---------------------------------------------------------------------------

D. Anti-Money Laundering Programs

    The provisions of 31 U.S.C. 5318(h), added to the BSA in 1992 by 
section 1517 of the Annunzio-Wylie Anti-Money Laundering Act 
(``Annunzio-Wylie Act''), authorize the Secretary ``[i]n order to guard 
against money laundering through financial institutions . . . [to] 
require financial institutions to carry out anti-money laundering 
programs.'' \51\ Those programs must include, at a minimum, ``the 
development of internal policies, procedures, and controls;'' ``the 
designation of a compliance officer;'' ``an ongoing employee training 
program;'' and ``an independent audit

[[Page 52686]]

function to test programs.'' \52\ Title III of the USA PATRIOT Act 
amended 31 U.S.C. 5318(h) to make the establishment of anti-money 
laundering programs mandatory for financial institutions.\53\
---------------------------------------------------------------------------

    \51\ 31 U.S.C. 5318(h)(1); Annunzio-Wylie Act, Title XV of the 
Housing and Community Development Act of 1992, Public Law 102-550.
    \52\ 31 U.S.C. 5318(h)(1)(A)-(D).
    \53\ Section 352(a) of the Act, which became effective on April 
24, 2002, amended section 5318(h) of the BSA.
---------------------------------------------------------------------------

    Registered investment advisers are currently subject to Federal 
securities laws governing the securities industry, which require the 
establishment of a variety of policies, procedures, and controls. The 
Advisers Act requires a registered investment adviser to maintain 
certain books and records, as prescribed by the SEC.\54\ Under 17 CFR 
275.204-2, an SEC-registered investment adviser is required to keep 
certain books and records that relate to its investment advisory 
business.\55\ Under 17 CFR 275.203-1, investment advisers are also 
required to complete and submit Form ADV to the SEC. The Advisers Act 
also prohibits an investment adviser from engaging in fraudulent, 
deceptive, and manipulative conduct.\56\ SEC rules require investment 
advisers to adopt and implement written policies and procedures 
reasonably designed to prevent violation of the Advisers Act and the 
rules that the SEC has adopted under that Act.\57\ Advisers must 
conduct annual reviews to ensure the adequacy and effectiveness of 
their policies and procedures and must designate a chief compliance 
officer responsible for administering the policies and procedures.\58\ 
Accordingly, FinCEN contemplates that investment advisers would be able 
to adapt existing policies, procedures, and internal controls in order 
to comply with the rules FinCEN is proposing today. Moreover, some 
investment advisers have already implemented AML programs either 
voluntarily or in conjunction with an SEC No-Action letter permitting 
broker-dealers in securities to rely on registered investment advisers 
to perform some or all aspects of broker-dealers' customer 
identification program (``CIP'') obligations.\59\
---------------------------------------------------------------------------

    \54\ See 15 U.S.C. 80b-4(a) (requiring investment advisers to 
make and retain records as defined in section 3(a)(37) of the 
Exchange Act and to make and disseminate reports as prescribed by 
the SEC).
    \55\ See 17 CFR 275.204-2 (Books and records to be maintained by 
investment advisers).
    \56\ See, e.g., 15 U.S.C. 80b-6(1), (2) and (4) (Advisers Act 
prohibiting registered and unregistered investment advisers from 
engaging in any activity that would defraud a client or prospective 
client). See also 17 CFR 275.206(4)-8 (SEC rule prohibiting 
registered and unregistered investment advisers from making false or 
misleading statements to, or otherwise defrauding, investors or 
prospective investors to pooled investment vehicles).
    \57\ 17 CFR 275.206(4)-7(a).
    \58\ 17 CFR 275.206(4)-7(b) and (c).
    \59\ Under the SEC No-Action letter re-issued in consultation 
with FinCEN on January 9, 2015, a broker-dealer in securities is 
permitted to rely on a registered investment adviser to perform all 
or part of its CIP obligations with regard to shared clients as if 
the investment adviser were subject already to an AML program rule, 
provided the other provisions of CIP reliance are met. Securities 
and Exchange Commission, Division of Trading and Markets, Request 
for No-Action Relief Under Broker-Dealer Customer Identification 
Rule (31 CFR 1023.220) (Jan. 9, 2015) available at http://www.sec.gov/divisions/marketreg/mr-noaction/2015/sifma-010915-17a8.pdf. See also 31 CFR 1023.220(a)(6) (CIP rule permitting a 
financial institution to rely on another financial institution to 
perform all or part of its obligations to verify the identity of its 
customers as required by 31 U.S.C. 5318(h)).
---------------------------------------------------------------------------

1. Overview of AML Program Requirement
    Section 1031.210(a)(1) of the proposed rule would require each 
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. Section 1031.210(a)(2) 
would require each investment adviser's AML program to be approved in 
writing by its board of directors or trustees, or if the investment 
adviser does not have a board, by its sole proprietor, general partner, 
trustee, or other persons that 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 four minimum requirements for the AML program are set forth in 
section 1031.210(b) and are discussed in greater detail below. The AML 
program requirement is not a one-size-fits-all requirement but rather 
is risk-based. The risk-based approach of the proposed rule is intended 
to give investment advisers the flexibility to design their programs to 
meet the specific risks of the advisory services they provide and the 
clients they advise.\60\ For example, large firms should adopt 
policies, procedures, and internal controls addressing the 
responsibilities of the individuals and departments carrying out each 
aspect of the AML program, while smaller firms will likely adopt 
procedures that are consistent with their (often) simpler, more 
centralized organizational structures.\61\ This flexibility is designed 
to ensure that all firms subject to FinCEN's AML program requirements, 
from the smallest to the largest, and the simplest to the most complex, 
have in place policies, procedures, and internal controls appropriate 
to their advisory business 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.
---------------------------------------------------------------------------

    \60\ The legislative history of the BSA reflects that Congress 
intended that each financial institution should have the flexibility 
to tailor its program to fit its business, taking into account 
factors such as size, location, activities, and risks or 
vulnerabilities to money laundering, so long as the program meets 
the four minimum statutory requirements. This flexibility is 
designed to ensure that all firms, from the largest to the smallest, 
have in place policies and procedures appropriate to monitor for 
money laundering. See USA PATRIOT Act of 2001: Consideration of H.R. 
3162 Before the Senate, 147 Cong. Rec. S10990-02 (Oct. 25, 2001) 
(statement of Sen. Sarbanes); Financial Anti-Terrorism Act of 2001: 
Consideration Under Suspension of Rules of H.R. 3004 Before the 
House of Representatives, 147 Cong. Rec. H6938-39 (Oct. 17, 2001) 
(statement of Rep. Kelly) (provisions of the Financial Anti-
Terrorism Act of 2001 were incorporated as Title III in the Act).
    \61\ According to the 2014 Evolution Revolution Report, which is 
based on Part 1 of the Form ADVs filed by SEC-registered investment 
advisers, as of April 7, 2014, there were 10,895 investment advisers 
registered with the SEC managing $61.7 trillion in regulatory assets 
under management (RAUM). Many advisers have relatively few 
employees. 6,216 advisers (57.1%) reported having 10 or fewer full-
time and part-time non-clerical employees and 9,581 (87.9%) reported 
having 50 or fewer such employees. However, a relatively small 
number of very large advisers manage a high percentage of the 
reported RAUM. One hundred and twelve (1%) of the largest registered 
advisers (those reporting $100 billion or more in RAUM) collectively 
accounted for 52.6% of all reported RAUM. Advisers with less than $1 
billion RAUM, which account for 71.5% of all registered advisers, 
collectively managed 3.5% of all reported RAUM. See 2014 Evolution 
Revolution; A Profile of the Investment Adviser Profession at page 
5, available at (https://www.investmentadviser.org/eweb/).
---------------------------------------------------------------------------

2. Scope
    Generally, an investment adviser's program must cover all of its 
advisory activity, whether the adviser is acting as the primary adviser 
or a subadviser. The discussion below focuses on FinCEN's expectations 
with respect to the coverage of the following specific types of 
services: (a) Advisory services that do not include the management of 
client assets; (b) subadvisory services; and (c) advisory services 
provided to real estate funds.
(a) Provision of Other Advisory Services
    An investment adviser may provide clients with advisory services, 
such as pension consulting, securities news letters, research reports, 
or financial planning that do not include the management of client 
assets.

[[Page 52687]]

Additionally, an investment adviser may provide other clients with 
advisory services that are a combination of asset management and the 
advisory services discussed above. FinCEN would expect an investment 
adviser to address in its AML program all of its advisory activity, 
including activity that does not entail the management of client 
assets.
(b) Subadvisory Services
    Today's rule, as proposed, would require an investment adviser 
providing subadvisory services to a client to address these services in 
its AML program and to monitor such services for potentially suspicious 
activity. FinCEN acknowledges that requiring an investment adviser to 
address in its AML program the subadvisory services it provides certain 
types of clients may result in some duplication of effort, such as when 
the primary adviser is subject to today's proposed rule. However, there 
may be some instances in which an investment adviser provides 
subadvisory services to a client that has a primary adviser not subject 
to the AML program and SAR requirements proposed today, e.g., certain 
mid-sized advisers that do not meet the criteria for SEC registration. 
Under this circumstance, the application of the investment adviser's 
AML and SAR programs to the subadvisory activity will mitigate the 
potential risk that the subadviser could be used for money laundering, 
terrorist financing, or other illicit activity.
(c) Real Estate Funds
    Today's proposed rule would require an investment adviser to 
include in its AML program the advisory activity it provides to any 
publicly or privately offered real estate fund. The proposed rule does 
not require a real estate fund to establish and implement its own AML 
program, but instead requires a person that meets today's proposed 
definition of investment adviser, and that provides advisory services 
to such a fund, to include this advisory activity in its own AML 
program. The proposed rule does not provide for any explicit 
limitations or exceptions for the advisory activity provided to a real 
estate fund.
3. Addressing Money Laundering and Terrorist Financing Risks
    In developing its program, an investment adviser would need to 
analyze the money laundering and terrorist financing risks posed by a 
particular client that maintains an account with the adviser by using a 
risk-based evaluation of relevant factors. This type of review could 
build upon the investment adviser's efforts to comply with the Federal 
securities laws applicable to investment advisers. If the client is an 
individual, the source of the client's funds and the jurisdiction in 
which the client is located, among other things, would be significant 
factors. If a client is an entity, an investment adviser may consider 
the type of entity, the jurisdiction in which it is located, and the 
statutory and regulatory regime of that jurisdiction, if relevant.\62\ 
The investment adviser's historical experience with the individual or 
entity and the references of other financial institutions may also be 
relevant factors. The investment adviser's risk assessment should also 
include any other relevant factors that may be particular to the 
adviser's business and the client. An investment adviser should monitor 
the advisory activity it provides to its clients for potentially 
suspicious activity. Based on the investment adviser's risk assessment, 
as the risks posed by a client increase, the adviser's policies, 
procedures, and internal controls will need to be reasonably designed 
to prevent the adviser from being used by the client for money 
laundering or terrorist financing. FinCEN recognizes that some types of 
clients and/or client activities will pose greater risks for money 
laundering or terrorist financing than others.
---------------------------------------------------------------------------

    \62\ If an entity is organized or registered in a foreign 
jurisdiction, an investment adviser should ascertain whether the 
jurisdiction has been identified by the Financial Action Task Force 
(``FATF'') as a jurisdiction subject to a FATF call for counter-
measures or a jurisdiction with strategic AML/CFT deficiencies. See 
generally FATF Web site, available at http://www.fatf-gafi.org/. 
FinCEN has issued several advisories informing financial 
institutions of the AML/CFT deficiencies of such jurisdictions. See 
generally FinCEN Web site, available at http://www.fincen.gov/news_room/advisory/.
---------------------------------------------------------------------------

    In view of the comment letters submitted in response to the First 
Proposed Investment Adviser Rule, the discussion below focuses on 
FinCEN's expectations regarding how an investment adviser's AML program 
may address the money laundering or terrorist financing risks that may 
be presented by certain specific types of advisory clients, as well as 
how an adviser's program may address the risks presented by certain 
specific advisory services provided to those clients. The following 
types of clients will be discussed: (a) Non-pooled investment vehicle 
clients (e.g., individuals and institutions); (b) registered open-end 
fund clients; (c) registered closed-end fund clients; and (d) private 
fund clients/unregistered pooled investment vehicle clients. In 
addition, this section describes FinCEN's expectations under a risk-
based approach regarding advisory services to wrap fee programs.
(a) Non-Pooled Investment Vehicle Clients
    Advisers are vulnerable to money laundering or terrorist financing 
risks when managing the assets of non-pooled investment vehicle clients 
(e.g., individuals and institutions).\63\ Accordingly, an investment 
adviser's assessment of the risks presented by the different types of 
advisory services it provides to such clients should take into account 
the types of accounts offered (e.g., managed accounts), the types of 
clients opening such accounts, and how the accounts are funded.
---------------------------------------------------------------------------

    \63\ See also Anti-Money Laundering Programs for Investment 
Advisers at 23649 (discussing an adviser's higher vulnerability to 
risk of being used for money laundering when clients place their 
assets under management with the adviser and possible indicia of 
money laundering activities that should be included in an investment 
adviser's AML program procedures).
---------------------------------------------------------------------------

(b) Registered Open-End Fund Clients (Mutual Funds)
    Generally, FinCEN acknowledges that the advisory services provided 
to registered open-end fund clients, specifically mutual funds, may 
present lower money laundering and terrorist financing risks to the 
investment adviser than the advisory activities provided to other types 
of pooled investment vehicles, such as private funds and other 
unregistered pooled investment vehicles, because registered open-end 
investment companies are subject to the full panoply of FinCEN's rules 
implementing the BSA. Registered open-end investment companies already 
are required to, among other things, establish AML and customer 
identification programs and report suspicious activity. The BSA 
requirements to which mutual funds are subject may mitigate the money 
laundering risks that a mutual fund client and the mutual fund's 
underlying client base or investors present to an investment adviser.
(c) Registered Closed-End Fund Clients
    FinCEN recognizes that the advisory activity provided to a closed-
end fund may present a lower risk for money laundering, terrorist 
financing, and other illicit activity than other types of advisory 
activity.\64\ Purchases and sales of closed-end fund shares are 
executed through broker-dealers or banks, and these entities are 
already required to

[[Page 52688]]

establish and implement AML programs under the BSA. Consequently, given 
the risk-based approach required in the AML programs for financial 
institutions generally, including investment advisers, FinCEN would 
expect an investment adviser to risk-rate the advisory services it 
provides to a closed-end fund to reflect a lower risk for money 
laundering or terrorist financing than other types of advisory 
activity, such as that provided to a private fund or other unregistered 
pooled investment vehicle.
---------------------------------------------------------------------------

    \64\ See A Report to Congress in Accordance with 356(c) of the 
Uniting and Strengthening America by Providing the Appropriate Tools 
Required to Intercept and Obstruct Terrorism Act of 2001 (USA 
PATRIOT Act) at pages 15-7.
---------------------------------------------------------------------------

(d) Private Fund Clients/Unregistered Pooled Investment Vehicles
    An investment adviser that is the primary adviser to a private fund 
or other unregistered pooled investment vehicle is required to make a 
risk-based assessment of the money laundering and terrorist financing 
risks presented by the investors in such investment vehicles by 
considering the same types of relevant factors, as appropriate, as the 
adviser would consider for clients for whom the adviser manages assets 
directly, as discussed above.\65\ Generally, when an investment adviser 
is the primary adviser for a private fund or other unregistered pooled 
investment vehicle, the adviser should have access to information about 
the identities and transactions of the underlying or individual 
investors. FinCEN notes, however, that there may be a lack of 
transparency regarding the entities that invest in private funds and 
other unregistered pooled investment vehicles.\66\ The lack of 
transparency regarding the investors may put these types of investment 
vehicles at risk for money laundering, terrorist financing, fraud, and 
other illicit activity. Under certain circumstances, FinCEN further 
recognizes that an investment adviser may be required to assess the 
money laundering and terrorist financing risks associated with the 
underlying investors of a client that is a private fund or other 
unregistered pooled investment vehicle using a risk-based approach.
---------------------------------------------------------------------------

    \65\ See generally discussions supra ``Scope'' and ``Non-Pooled 
Investment Vehicle Clients.'' See also Anti-Money Laundering 
Programs for Investment Advisers at 23650 (proposing a similar 
approach for an adviser that creates or administers a pooled 
investment vehicle not subject to BSA requirements).
    \66\ See Anti-Money Laundering Programs for Unregistered 
Investment Companies at 60621 (investors in unregistered investment 
companies may include individuals and institutional investors [such 
as pension funds and corporations], as well as other registered and 
unregistered investment companies [i.e., ``funds of hedge funds'']; 
the diversity and complexity of the structures of these pooled 
investment vehicles, particularly those with offshore operations, 
may result in a lack of transparency regarding the entities that 
invest in the unregistered investment company).
---------------------------------------------------------------------------

    FinCEN recognizes that certain private funds and other unregistered 
pooled investment vehicles may present lower risks for money laundering 
or terrorist financing than others. Consequently, FinCEN would not 
expect an investment adviser to risk-rate the advisory services it 
provides to a pooled investment vehicle that presents a lower risk the 
same as it might rate the advisory services it provides to other types 
of pooled investment vehicles that may present higher risks for 
attracting money launderers, terrorist financers, or other illicit 
actors.
    If any of the investors in the private fund or other unregistered 
pooled investment vehicle for which the investment adviser is acting as 
the primary adviser are themselves private funds or some other type of 
unregistered pooled investment vehicles (an ``investing pooled 
entity''), the investment adviser will need to assess the money 
laundering or terrorist financing risks associated with these investing 
pooled entities using a risk-based approach.
    Investment advisers acting as primary advisers may provide advisory 
services to a private fund or other unregistered pooled investment 
vehicle that operates offshore.\67\ That is, investment advisers may 
advise a private fund or other unregistered pooled investment vehicle 
that may be organized in the United States or in a foreign 
jurisdiction, and interests in these pools may be offered to U.S. and/
or foreign investors. In the rule FinCEN is proposing today, regardless 
of offshore formation or offering, an investment adviser should apply 
the same policies and the procedures as discussed above to any private 
fund or other unregistered pooled investment vehicle for which the 
investment adviser provides advisory services.
---------------------------------------------------------------------------

    \67\ See General Instructions for Part 2 of Form ADV, Item 
10.C.2 available at http://www.sec.gov/about/forms/formadv-part2.pdf 
(requiring SEC-registered investment advisers to include in their 
narrative brochure to clients any relationship or arrangement that 
the adviser has with an offshore fund that is material to its 
advisory business or to its clients). See also Anti-Money Laundering 
Programs for Unregistered Investment Companies at note 31.
---------------------------------------------------------------------------

(e) Wrap Fee Programs
    In some instances, the sponsoring securities broker-dealer of a 
wrap fee program may be dually registered as an investment adviser.\68\ 
As discussed above, FinCEN would expect such an investment adviser to 
address the money laundering or terrorist financing risks of the 
underlying clients in the program.
---------------------------------------------------------------------------

    \68\ A ``wrap fee program'' for purposes of the rules being 
proposed today is a program under which investment advisory and 
brokerage execution services are provided for a single ``wrapped'' 
fee that is not based on the number of transactions executed in a 
client's account. An investment advisory program under which all 
clients pay traditional, transaction-based commissions is not a wrap 
fee program. Similarly, a program under which client assets are 
allocated among mutual funds is not a wrap fee program, because 
normally there is no payment for brokerage execution. See Securities 
and Exchange Commission--Division of Investment Management, General 
Regulation of Investment Advisers at http://www.sec.gov/divisions/investment/iaregulation/memoia.htm.
---------------------------------------------------------------------------

    In other instances, an investment adviser may provide advisory 
services to a wrap fee program that is sponsored by an unaffiliated 
broker-dealer. Although under such circumstances the investment adviser 
may have more limited access to investor information and transactions, 
such an adviser may still have access to information that would enable 
the adviser to identify money laundering, terrorist financing, or other 
illicit activity.
4. Dually Registered Investment Advisers and Advisers Affiliated With 
or Subsidiaries of Entities Required To Establish Anti-Money Laundering 
Programs
    Some investment advisers are dually registered with the SEC as 
investment advisers and broker-dealers in securities. Other investment 
advisers may be affiliated with, or subsidiaries of, entities that are 
either defined as a financial institution under the BSA in other 
capacities, or are otherwise required to establish AML programs. With 
respect to an investment adviser that is dually registered as a broker-
dealer, FinCEN is not proposing to require such an adviser to establish 
multiple or separate AML programs so long as a comprehensive AML 
program covers all of the entity's advisory and broker-dealer 
activities and businesses. The program must be designed to address the 
different money laundering risks posed by the different aspects of the 
dually registered entity's businesses and satisfy each of the risk-
based AML program requirements to which it is subject in its capacity 
as an investment adviser and broker-dealer in securities.\69\ 
Similarly, an investment

[[Page 52689]]

adviser affiliated with, or a subsidiary of, an entity required to 
establish an AML program in another capacity does not have to implement 
multiple or separate programs as long as the program covers all of the 
entity's activities and businesses that are subject to the BSA. The 
program must be designed to address the different money laundering 
risks posed by the different aspects of the entity's business and 
satisfy each of the risk-based AML program and any other BSA 
requirements to which it is subject in all of its regulated capacities, 
as for example an investment adviser and a bank or insurance 
company.\70\
---------------------------------------------------------------------------

    \69\ FinCEN notes that while broker-dealers in securities are 
subject to the full panoply of FinCEN's regulations implementing the 
BSA, investment advisers would not be subject to certain of those 
BSA requirements, e.g., the customer identification rule. FinCEN 
expects that an entity dually registered as a broker-dealer in 
securities and an investment adviser will design an enterprise-wide 
AML compliance program under which its broker dealer activities 
would be subject to BSA requirements appropriate to broker dealers, 
and its investment advisory activities would be subject to the BSA 
requirements required by this proposed rule.
    \70\ FinCEN notes that although certain insurance companies are 
required to establish and implement AML programs and report 
suspicious activity, the term ``insurance company'' is not included 
within the general definition of financial institution under 
FinCEN's regulations and, therefore, such insurance companies are 
not required to file CTRs with FinCEN or comply with the 
Recordkeeping and Travel Rules and other related recordkeeping 
requirements. Accordingly, FinCEN would not expect an insurance 
company that is affiliated with or owns an investment adviser to 
design an enterprise-wide AML compliance program that would subject 
the insurance company to BSA requirements not required by FinCEN's 
regulations. Conversely, FinCEN would not expect a bank, which is 
subject to the full panoply of FinCEN's regulations implementing the 
BSA that is affiliated with or owns an investment adviser to design 
an enterprise-wide AML compliance program that would subject the 
investment adviser to BSA requirements that would not be required by 
the rules FinCEN is proposing today.
---------------------------------------------------------------------------

    FinCEN recognizes the importance of enterprise-wide compliance and, 
therefore, believes it would be beneficial and cost-effective for these 
types of entities to implement one comprehensive AML program that 
includes all activities covered by FinCEN's regulations. However, these 
entities are not required to establish one comprehensive AML program; 
they may instead establish multiple programs to satisfy their AML 
obligations.
5. Delegation of Duties
    As indicated by the discussion of various client relationships and 
services above, an investment adviser's advisory services may involve 
other financial institutions, such as broker-dealers, banks, mutual 
funds, or other investment advisers that have separate AML program 
requirements. In addition, an investment adviser may conduct some of 
its operations through agents or third-party service providers, such as 
broker-dealers in securities (including prime brokers), custodians, and 
transfer agents. Some elements of the compliance program may best be 
performed by personnel of these entities, in which case it is 
permissible for an investment adviser to delegate contractually the 
implementation and operation of those aspects of its AML program to 
such an entity.\71\ Any investment adviser that delegates the 
implementation and operation of aspects of its AML program to another 
financial institution, agent, third-party service provider, or other 
entity, however, will remain fully responsible for the effectiveness of 
the program, as well as for ensuring that FinCEN and the SEC are able 
to obtain information and records relating to the AML program.
---------------------------------------------------------------------------

    \71\ See e.g., Anti-Money Laundering Programs for Investment 
Advisers at 23650.
---------------------------------------------------------------------------

6. AML Program Approval
    Section 1031.210(a)(2) of the proposed rule would require that each 
investment adviser's AML program be approved in writing by its board of 
directors or trustees, or if it does not have a board, by its sole 
proprietor, general partner, trustee, or other persons that have 
functions similar to a board of directors. This provision of the 
proposed rule would assure that the requirement to have an AML program 
receives the appropriate level of attention and is sufficiently 
flexible to permit an investment adviser to comply with this 
requirement based on its particular organizational structure. An 
investment adviser's written program would have to be made available to 
FinCEN or the SEC upon request.
7. The Required Elements of an Anti-Money Laundering Program
(a) Establish and Implement Policies, Procedures, and Internal Controls
    Section 1031.210(b)(1) requires an investment adviser's written AML 
program to establish and implement policies, procedures, and internal 
controls based upon the investment adviser's assessment of the money 
laundering or terrorist financing risks associated with its business. 
The policies, procedures, and internal controls should be reasonably 
designed to prevent the investment adviser from being used for 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. Generally, an investment adviser 
must review, among other things, the types of advisory services it 
provides and the nature of the clients it advises to identify its 
vulnerabilities to money laundering and terrorist financing activities, 
and the adviser's policies, procedures, and internal controls must be 
developed based on this review. An investment adviser's AML program may 
encompass many types of advisory clients, including individuals, 
institutions, registered investment companies, and other pooled 
vehicles, including private funds and other unregistered pools, 
regardless of whether the investment adviser is acting as the primary 
adviser or a subadviser.
(b) Provide for Independent Testing for Compliance To Be Conducted by 
Company Personnel or by a Qualified Outside Party
    Section 1031.210(b)(2) requires that an investment adviser provide 
for independent testing of the program on a periodic basis to ensure 
that it complies with the requirements of the rule and that the program 
functions as designed. Employees of either the investment adviser, its 
affiliates, or unaffiliated service providers may conduct the 
independent testing, so long as those same employees are not involved 
in the operation and oversight of the program. The employees should be 
knowledgeable regarding BSA requirements. The frequency of the 
independent testing will depend upon the investment adviser's 
assessment of the risks posed. Any recommendations resulting from such 
testing should be promptly implemented or submitted to senior 
management for consideration.
(c) Designate a Person or Persons Responsible for Implementing and 
Monitoring the Operations and Internal Controls of the Program
    Section 1031.210(b)(3) requires that an investment adviser 
designate a person or persons to be responsible for implementing and 
monitoring the operations and internal controls of the AML program. An 
investment adviser may designate a single person or committee to be 
responsible for compliance. The person or persons should be 
knowledgeable and competent regarding FinCEN's regulatory requirements 
and the adviser's money laundering risks, and should have full 
responsibility and authority to develop and enforce appropriate 
policies and procedures to address those risks. Whether the compliance 
officer is dedicated full time to BSA compliance would depend on the 
size and type of advisory services the adviser provides and the clients 
it serves. A person designated as a compliance officer should be an 
officer of the investment adviser. FinCEN notes that in order to comply 
with this requirement of the AML program, investment advisers should be 
able to

[[Page 52690]]

adapt existing policies and procedures.\72\
---------------------------------------------------------------------------

    \72\ See discussion supra Section IV.D (``Anti-Money Laundering 
Programs'') for a discussion of existing Advisers Act recordkeeping 
and reporting obligations that would enable investment advisers to 
adapt existing policies, procedures, and internal controls in order 
to comply with the AML program requirement to designate a compliance 
officer.
---------------------------------------------------------------------------

(d) Provide Ongoing Training for Appropriate Persons
    Section 1031.210(b)(4) requires that an investment adviser provide 
for training of appropriate persons. Employee training is an integral 
part of any AML program. In order to carry out their responsibilities 
effectively, employees of an investment adviser (and of any agent or 
third-party service provider) must be trained in BSA requirements 
relevant to their functions and in recognizing possible signs of money 
laundering that could arise in the course of their duties. Such 
training may be conducted by outside or in-house seminars, and may 
include computer-based training. The nature, scope, and frequency of 
the investment adviser's training program would be determined by the 
responsibilities of the employees and the extent to which their 
functions bring them in contact with BSA requirements or possible money 
laundering activity. Consequently, the training program should provide 
a general awareness of overall BSA requirements and money laundering 
issues, as well as more job-specific guidance regarding particular 
employees' roles and functions in the AML program. For those employees 
whose duties bring them in contact with BSA requirements or possible 
money laundering activity, the requisite training should occur when the 
employee assumes those duties. Moreover, these employees should receive 
periodic updates and refreshers regarding the AML program.

E. Applicability Date

    Section 1031.210(c) states the effective date by which an 
investment adviser must comply with this section. FinCEN is proposing 
that an investment adviser must develop and implement an AML program 
that complies with the requirements of this section on or before six 
months from the effective date of the regulation.

F. Reports of Suspicious Transactions

    In 1992, the Annunzio-Wylie Act authorized the Secretary to require 
financial institutions to report suspicious transactions.\73\ FinCEN 
has issued rules under this authority requiring banks, casinos, money 
services businesses, broker-dealers in securities, mutual funds, 
insurance companies, futures commission merchants, and introducing 
brokers in commodities, among others, to report suspicious 
activity.\74\ Suspicious activity reporting by these and other types of 
financial institutions provides information highly useful in law 
enforcement and regulatory investigations and proceedings, as well as 
in the conduct of intelligence activities to protect against 
international terrorism.\75\ Requiring investment advisers to report 
suspicious activity is similarly expected to provide useful information 
for investigations and proceedings involving domestic and international 
money laundering, terrorist financing, fraud, and other financial 
crimes. Requiring investment advisers to report suspicious activity 
also narrows the regulatory gap that may be exploited by money 
launderers seeking access to the U.S. financial system through 
financial institutions not required to report suspicious transactions.
---------------------------------------------------------------------------

    \73\ 31 U.S.C. 5318(g) was added to the BSA by section 1517 of 
the Annunzio-Wylie Anti-Money Laundering Act, Title XV of Public Law 
102-550 (October 28,1992); it was expanded by section 403 of the 
Money Laundering Suppression Act of 1994 (the Money Laundering 
Suppression Act), Title IV of the Riegle Community Development and 
Regulatory Improvement Act of 1994, Public Law 103-325, to require 
designation of a single government recipient for reports of 
suspicious transactions. As amended by the USA PATRIOT Act, 
subsection (g)(1) states generally that ``the Secretary may require 
any financial institution, and any director, officer, employee, or 
agent of any financial institution, to report any suspicious 
transaction relevant to a possible violation of law or regulation.''
    \74\ See 31 CFR 1020.320, 1021.320, 1022.320, 1023.320, 
1024.320, 1025.320, and 1026.320, 1029.320 and 1030.320.
    \75\ See 31 U.S.C. 5311 (Declaration of Purpose of the Bank 
Secrecy Act).
---------------------------------------------------------------------------

    The rule, as proposed, does not permit investment advisers to share 
SARs within their corporate organizational structures in the absence of 
further guidance. In 2010, in close consultation with the Federal 
banking agencies, the SEC, and the Commodity Futures Trading 
Commission, FinCEN finalized proposed amendments to the SAR rules that, 
among other things, clarified the scope of the statutory prohibition 
against the disclosure by a financial institution of a SAR.\76\ At the 
same time, FinCEN finalized two pieces of interpretive guidance 
clarifying that banks, broker-dealers in securities, mutual funds, 
futures commission merchants, and introducing brokers in commodities 
could share SARs, subject to certain limitations, within their 
corporate organizational structures.\77\ Although the guidance was 
limited to these industries, the final rule noted that the regulatory 
framework being finalized would facilitate the potential expansion of 
this authority to other industries in the future. FinCEN understands 
that investment advisers may find it necessary to share SARs within 
their organizational structures to fulfill reporting obligations under 
the BSA, and to facilitate more effective enterprise-wide BSA 
compliance. FinCEN is interested in hearing from investment advisers on 
this specific issue (see the Request for Comment section) and is 
mindful that guidance on this topic may need to be issued in a timely 
manner following the issuance of any final rule.
---------------------------------------------------------------------------

    \76\ See generally Confidentiality of Suspicious Activity 
Reports, 75 FR 75593 (Dec. 3, 2010).
    \77\ See generally Sharing Suspicious Activity Reports by 
Securities Broker-Dealers, Mutual Funds, Futures Commission 
Merchants, and Introducing Brokers in Commodities with Certain U.S. 
Affiliates, FIN-2010-G005 (Nov. 23, 2010) and Sharing Suspicious 
Activity Reports by Depository Institutions with Certain U.S. 
Affiliates, FIN-2010-G006 (Nov. 23, 2010).
---------------------------------------------------------------------------

1. Reports by Registered Investment Advisers of Suspicious Transactions
    Proposed Sec.  1031.320(a) sets forth the obligation of investment 
advisers to report suspicious transactions that are conducted or 
attempted by, at, or through an investment adviser and involve or 
aggregate at least $5,000 in funds or other assets. The $5,000 minimum 
amount in this proposed rule is consistent with the SAR filing 
requirements for most other financial institutions that are subject to 
a SAR reporting requirement under FinCEN's rules implementing the 
BSA.\78\ A transaction is reportable under this proposed rule 
regardless of whether the transaction involves currency.\79\ Filing a 
report of a suspicious transaction does not relieve an investment 
adviser from the responsibility of complying with the Advisers Act or 
any rule imposed by the SEC.
---------------------------------------------------------------------------

    \78\ See 31 CFR 1024.320(a), 1023.320(a), 1020.320(a), 
1021.320(a), 1026.320(a), and 1021.320(a) (requiring mutual funds, 
broker-dealers in securities, banks, futures commission merchants 
and introducing brokers in commodities, and casinos to report 
suspicious transactions if they involve in the aggregate at least 
$5,000).
    \79\ See 31 U.S.C. 5318(g)(1).
---------------------------------------------------------------------------

    Section 1031.320(a)(1) contains the general statement of the 
obligation to file reports of suspicious transactions. The obligation 
extends to transactions conducted or attempted by, at, or through an 
investment adviser. To clarify that the proposed rule imposes a 
reporting requirement that is uniform with that for other financial 
institutions, Sec.  1031.320(a)(1) incorporates language from the 
suspicious activity reporting

[[Page 52691]]

rules applicable to other financial institutions, such as banks, 
broker-dealers in securities, mutual funds, casinos, and money services 
businesses. Furthermore, this section of the proposed rule contains a 
provision that permits an investment adviser to report voluntarily any 
transaction the investment adviser believes is relevant to the possible 
violation of any law or regulation but that is not otherwise required 
to be reported by this proposed rule. Thus, the rule encourages the 
voluntary reporting of suspicious transactions in cases in which the 
rule does not explicitly require reporting, such as in the case of a 
transaction that is below the $5,000 threshold of the proposed rule in 
Sec.  1031.320(a)(2). Such voluntary reporting is subject to the same 
protection from liability as mandatory reporting pursuant to 31 U.S.C. 
5318(g)(3). Section 1031.320(a)(2) requires the reporting of suspicious 
activity that involves or aggregates at least $5,000 in funds or other 
assets. Sections 1031.320(a)(2)(i) through (iv) specifies that an 
investment adviser is 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): (i) Involves funds 
derived from illegal activity or is intended or conducted to hide or 
disguise funds or assets derived from illegal activity; (ii) is 
designed, whether through structuring or other means, to evade the 
requirements of the BSA; (iii) has no business or apparent lawful 
purpose, and the investment adviser knows of no reasonable explanation 
for the transaction after examining the available facts; or (iv) 
involves the use of the investment adviser to facilitate criminal 
activity.\80\
---------------------------------------------------------------------------

    \80\ The fourth category of reportable transactions has been 
added to the suspicious activity reporting rules promulgated since 
the passage of the USA PATRIOT Act to make it clear that the 
requirement to report suspicious activity encompasses the reporting 
of transactions involving fraud and those in which legally derived 
funds are used for criminal activity, such as the financing of 
terrorism.
---------------------------------------------------------------------------

    A determination as to whether a SAR must be filed should be based 
on all the facts and circumstances relating to the transaction and the 
client in question. Different types of clients and transactions will 
require different judgments. One commenter to the First Proposed 
Investment Adviser Rule included in its comments examples of money 
laundering red flags likely to be observed by an investment adviser. 
The red flags submitted included the following: (1) A client exhibits 
an unusual concern regarding the adviser's compliance with government 
reporting requirements or is reluctant or refuses to reveal any 
information concerning business activities, or furnishes unusual or 
suspicious identification or business documents; (2) a client appears 
to be acting as the agent for another entity but declines, evades, or 
is reluctant to provide any information in response to questions about 
that entity; (3) a client's account has a pattern of inexplicable and 
unusual withdrawals, contrary to the client's stated investment 
objectives; (4) a client requests that a transaction be processed in 
such a manner as to avoid the adviser's normal documentation 
requirements; or (5) a client exhibits a total lack of concern 
regarding performance returns or risk.\81\ FinCEN believes that these 
are all examples of circumstances that may be indicative of suspicious 
activity and warrant further consideration by the investment adviser. 
FinCEN notes, however, that the techniques of money laundering or 
terrorist financing are continually evolving, and there is no way to 
provide a definitive list of suspicious transactions.
---------------------------------------------------------------------------

    \81\ The Proposed Unregistered Investment Companies Rule also 
provided examples of suspicious transactions that could indicate 
potential money laundering in an unregistered investment company. 
See Anti-Money Laundering Programs for Unregistered Investment 
Companies at 60620.
---------------------------------------------------------------------------

    The proposed rule would require that an investment adviser evaluate 
client activity and relationships for money laundering risks and design 
a suspicious transaction monitoring program that is appropriate for the 
particular investment adviser in light of such risks. Some of the types 
of suspicious activity an investment adviser may see could include 
structuring and fraudulent activity. Suspicious activity observed in 
the subscription of private fund interests may include the use of money 
orders or travelers checks in structured amounts to avoid currency 
reporting requirements. A money launderer also could engage in 
structuring by funding a managed account or subscribing to a private 
fund by using multiple wire transfers from different accounts 
maintained at different financial institutions. Suspicious activity 
could include other unusual wire activity that does not correlate with 
a client's stated investment objectives. As discussed above, investment 
advisers should be able to build upon existing policies, procedures, 
and internal controls they currently have in place to comply with the 
Federal securities laws to which they are subject in order to report 
suspicious activity.
    Section 1031.320(a)(3) provides that the obligation to identify and 
report a suspicious transaction rests with the investment adviser 
involved in the transaction. However, where more than one investment 
adviser, or another financial institution with a separate suspicious 
activity reporting obligation, is involved in the same transaction, 
only one report is required to be filed. FinCEN recognizes that other 
financial institutions, such as broker-dealers in securities, mutual 
funds, and banks have separate reporting obligations that may involve 
the same suspicious activity.\82\ Furthermore, as discussed above, many 
investment advisers may be dually registered or affiliated with another 
financial institution. Therefore, in those instances, when an 
investment adviser and another financial institution are involved in 
the same transaction, only one report is required to be filed. It is 
permissible for either the investment adviser or the other financial 
institution to file a single joint report provided it contains all 
relevant facts and that each institution maintains a copy of the report 
and any supporting documentation.
---------------------------------------------------------------------------

    \82\ See 31 CFR 1023.320 and 1024.320.
---------------------------------------------------------------------------

2. Filing and Notification Procedures
    Proposed Sec.  1031.320(b)(1) through (4) sets forth the filing and 
notification procedures to be followed by investment advisers making 
reports of suspicious transactions. Within 30 days after an investment 
adviser becomes aware of a suspicious transaction, the adviser must 
report the transaction by completing and filing a SAR with FinCEN in 
accordance with all form instructions and applicable guidance. 
Supporting documentation relating to each SAR is to be collected and 
maintained separately by the investment adviser and made available upon 
request to FinCEN; any Federal, State, or local law enforcement agency; 
or any Federal regulatory authority, in particular the SEC, which 
examines the investment adviser for compliance with the BSA. Because 
supporting documentation is deemed to have been filed with the SAR, 
these authorities and agencies are consistent with those authorities or 
agencies to whom a SAR may be disclosed pursuant to proposed rules of 
construction, as discussed further below. For situations requiring 
immediate attention, such as suspected terrorist financing or ongoing 
money laundering schemes, investment advisers are required to notify 
immediately by telephone the appropriate law enforcement authority in 
addition to filing a timely SAR. Any investment adviser reporting 
suspicious transactions that may relate to terrorist

[[Page 52692]]

activity may call FinCEN's Resource Center (FRC) at 1-800-767-2825 in 
addition to filing timely a SAR if required by this section.
3. Retention of Records
    Proposed Sec.  1031.320(c) provides that investment advisers must 
maintain copies of filed SARs and the underlying related documentation 
for a period of five years from the date of filing. As indicated above, 
supporting documentation is to be made available to FinCEN and the 
prescribed law enforcement and regulatory authorities, upon request.
4. Confidentiality of SARs
    Proposed Sec.  1031.320(d) provides that a SAR and any information 
that would reveal the existence of a SAR are confidential and shall not 
be disclosed except as authorized in Sec.  1031.320(d)(1)(ii). Section 
1031.320(d)(1)(i) generally provides that no investment adviser, and no 
current or former director, officer, employee, or agent of any 
investment adviser, shall disclose a SAR or any information that would 
reveal the existence of a SAR. This provision of the proposed rule 
further provides that any investment adviser and any director, officer, 
employee, or agent of any investment adviser that is subpoenaed or 
otherwise requested to disclose a SAR or any information that would 
reveal the existence of a SAR, must decline to produce the SAR or such 
information and must notify FinCEN of such a request and any response 
thereto. In addition to reports of suspicious activity required by the 
proposed rule, investment advisers would be prohibited from disclosing 
voluntary reports of suspicious activity.\83\
---------------------------------------------------------------------------

    \83\ To encourage the reporting of possible violations of law or 
regulation and the filing of SARs, the BSA contains a safe harbor 
provision that shields financial institutions making such reports 
from civil liability. In 2001, the USA PATRIOT Act clarified that 
the safe harbor also covers voluntary disclosure of possible 
violations of law and regulations to a government agency and 
expanded the scope of the limit on liability to cover any civil 
liability which may exist under any contract or other legally 
enforceable agreement (including any arbitration agreement). See USA 
PATRIOT Act, section 351(a). Public Law 107-56, Title III, 351, 115 
Stat. 272, 321(2001); 31 U.S.C. 5318(g)(3).
---------------------------------------------------------------------------

    Section 1031.320(d)(1)(ii) provides three rules of construction 
that clarify the scope of the prohibition against the disclosure of a 
SAR by an investment adviser and closely parallel the rules of 
construction in the suspicious activity reporting rules for other 
financial institutions. As discussed above, the proposed rules of 
construction primarily describe situations that are not covered by the 
prohibition against the disclosure of a SAR or information that would 
reveal the existence of a SAR contained in Sec.  1031.320(d)(1). 
Section 1031.320(d)(1)(ii), however, makes clear that the rules of 
construction proposed today are each qualified by, and subordinate to, 
the statutory mandate that no person involved in any reported 
suspicious transaction can be notified that the transaction has been 
reported.
    The first rule of construction, in Sec.  1031.320(d)(1)(ii)(A)(1), 
does not prohibit an investment adviser, or any director, officer, 
employee or agent of an investment adviser from disclosing a SAR, or 
any information that would reveal the existence of a SAR, to FinCEN, or 
any Federal, State or local law enforcement agencies, or a Federal 
regulatory authority that examines the investment adviser for 
compliance with the BSA provided that no person involved in the 
reported transaction is notified that the transaction has been 
reported. As discussed above, FinCEN is proposing to delegate its 
examination authority for compliance with FinCEN's rules implementing 
the BSA to the SEC.
    The second rule of construction, in Sec.  1031.320(d)(1)(ii)(A)(2), 
provides that the phrase ``a SAR or information that would reveal the 
existence of a SAR'' does not include ``the underlying facts, 
transactions, and documents upon which a SAR is based.'' An investment 
adviser, or any director, officer, employee, or agent of an investment 
adviser, therefore, is not prohibited from disclosing the underlying 
facts, transactions, and documents upon which a SAR is based, including 
but not limited to, disclosures of such information to another 
financial institution or any director, officer, employee, or agent of a 
financial institution, for the preparation of a joint SAR, provided 
that no person involved in the reported transaction is notified that 
the transaction has been reported.
    The third rule of construction, in Sec.  1031.320(d)(1)(ii)(B), 
recognizes that investment advisers may find it necessary to share 
within their corporate organizational structures a SAR or information 
that would reveal the existence of a SAR for purposes consistent with 
Title II of the BSA. The proposed rule would not authorize sharing 
within an investment adviser's corporate organizational structure in 
the absence of further guidance or rulemaking by FinCEN as to 
circumstances under which such sharing would be consistent with Title 
II of the BSA.
    Section 1031.320(d)(2) incorporates the statutory prohibition 
against disclosure of SAR information by government users of SAR data 
other than in fulfillment of their official duties consistent with the 
BSA. The paragraph clarifies that official duties do not include the 
disclosure of SAR information in response to a request by a non-
governmental entity for non-public information \84\ or for use in a 
private legal proceeding, including a request under 31 CFR 1.11.\85\
---------------------------------------------------------------------------

    \84\ For purposes of this rulemaking, ``non-public information'' 
refers to information that is exempt from disclosure under the 
Freedom of Information Act.
    \85\ 31 CFR 1.11 is the Department of the Treasury's information 
disclosure regulation. Generally, these regulations are known as 
``Touhy regulations,'' after the Supreme Court's decision in United 
States ex rel. Touhy v. Ragen, 340 U.S. 462 (1951). In that case, 
the Supreme Court held that an agency employee could not be held in 
contempt for refusing to disclose agency records or information when 
following the instructions of his or her supervisor regarding the 
disclosure. As such, an agency's Touhy regulations are the 
instructions agency employees must follow when those employees 
receive requests or demands to testify or otherwise disclose agency 
records or information.
---------------------------------------------------------------------------

5. Limitation of Liability
    Proposed Sec.  1031.320(e) provides protection from liability for 
making either required or voluntary reports of suspicious transactions, 
and for failures to disclose the fact of such reporting to the full 
extent provided by 31 U.S.C. 5318(g)(3).
6. Compliance
    Proposed Sec.  1031.320(f) notes that compliance with the 
obligation to report suspicious transactions will be examined by FinCEN 
or its delegates and provides that failure to comply with the rule may 
constitute a violation of the BSA and FinCEN's regulations. As 
discussed above, pursuant to 31 CFR 1010.810(a), FinCEN has overall 
authority for enforcement and compliance with its regulations, 
including coordination and direction of procedures and activities of 
all other agencies exercising delegated authority. Further, pursuant to 
Sec.  1010.810(d), FinCEN has the authority to impose civil penalties 
for violations of the BSA and its regulations.
7. Compliance Date
    Proposed section 1031.320(g) provides that the new suspicious 
activity reporting requirement applies to transactions initiated after 
the implementation of an AML program required by Sec.  1031.210 of this 
part. However, investment advisers may and will be encouraged to begin 
filing SARs as soon as practicable on a voluntary basis upon the 
issuance of the final rule.
    Investment advisers may conduct some of their operations through 
agents or third-party service providers, which

[[Page 52693]]

may or may not be affiliated with the investment adviser, such as 
broker-dealers in securities, custodians, administrators, or transfer 
agents. Just as investment advisers are permitted to delegate the 
implementation and operation aspects of their AML programs to such 
service providers, an investment adviser is permitted to delegate its 
suspicious activity reporting requirements. However, if an investment 
adviser delegates such responsibility to an agent or a third-party 
service provider, the adviser remains responsible for its compliance 
with the requirement to report suspicious activity, including the 
requirement to maintain SAR confidentiality.

G. Special Information Sharing Procedures To Deter Money Laundering and 
Terrorist Activity

    Section 1031.500 proposes to subject investment advisers to 
FinCEN's rules implementing the special information sharing procedures 
to detect money laundering or terrorist activity requirements of 
sections 314(a) and 314(b) of the USA PATRIOT Act.\86\ Section 314(a) 
provides for the sharing of information between the government and 
financial institutions and allows FinCEN to require financial 
institutions to search their records to determine whether they have 
maintained an account or conducted a transaction with a person that law 
enforcement has certified is suspected of engaging in terrorist 
activity or money laundering. Section 314(b) provides financial 
institutions with the ability to share information with one another, 
under a safe harbor that offers protections from liability, in order to 
identify better and report potential money laundering or terrorist 
activities. Sections 1010.520 and 1010.540 implement sections 314(a) 
and 314(b) of the USA PATRIOT Act, respectively, and generally apply to 
any financial institution that is listed in 31 U.S.C. 5312(a)(2) and is 
subject to an AML program requirement. Section 1031.500 would state 
generally that investment advisers are subject to the special 
information sharing procedures to detect money laundering or terrorist 
activity requirements set forth and cross referenced in Sec. Sec.  
1031.520 (cross-referencing to 31 CFR 1010.520) and 1031.540 (cross-
referencing to 31 CFR 1010.540). Because FinCEN is proposing to include 
investment advisers within the definition of financial institution 
under section 5312(a)(2)(Y) and to require investment advisers to 
establish AML programs, investment advisers would also be subject to 
FinCEN's rules implementing section 314. The rules being proposed 
today, therefore, add subpart E to part 1031 to make clear that 
FinCEN's rules implementing section 314 would apply to investment 
advisers.
---------------------------------------------------------------------------

    \86\ See 31 U.S.C. 1010.520 and 1010.540.
---------------------------------------------------------------------------

V. Request for Comment

    FinCEN seeks comment on today's proposed rules and whether the 
rules are appropriate in light of the nature of investment adviser 
activities and the recent amendments to the Advisers Act under the 
Dodd-Frank Act. In particular, FinCEN seeks comment on the following 
aspects of the proposed rule.

Proposed Definition of Investment Adviser

    FinCEN requests comment on all aspects of the definition of 
``investment adviser'' as proposed in section 1010.100(nnn). In 
particular:
     Does the exclusion from the definition of investment 
adviser of those large advisers that qualify for and use an exemption 
from the requirement to register with the SEC place this class of 
investment adviser at risk for abuse by money launderers, terrorist 
financers, or other illicit actors? If so, should FinCEN include these 
advisers in its definition of investment adviser? What would be the 
disadvantage of doing so?
     Are there classes of investment advisers included in the 
definition of investment adviser that are not at risk, or present a 
very low risk for money laundering, terrorist financing, or other 
illicit activity such that they could appropriately be excluded from 
the definition? If so, why would it be appropriate to exclude such 
advisers from the definition as opposed to adopting an AML program that 
is appropriate to their level of risk?
     Should foreign advisers that are registered or required to 
register with the SEC, but that have no place of business in the United 
States, be included in the definition of investment adviser?
     To what extent are mid-sized, small, State-registered, and 
foreign private investment advisers that do not meet the definition of 
investment adviser proposed today at risk for being used for money 
laundering, terrorist financing, or other illicit activity?
     Are there other types of investment advisers that may not 
meet the definition as proposed today, such as exempt reporting 
advisers (``ERAs'') (whether the adviser is a U.S. or non-U.S. person), 
family offices, and financial planners, that are at risk for abuse by 
money launderers, terrorist financers, or other illicit actors?
     With regard to ERAs, are there differences in the risks 
associated with an adviser that qualifies for and elects to use the 
203(l) exemption from an adviser that qualifies for and elects to use 
the 203(m) exemption that would warrant different treatment under the 
BSA?
     Are there certain types of financial planners that are not 
included in the proposed definition that, based on the activities in 
which they engage, are at risk for being used for money laundering, 
terrorist financing, or other illicit activity?

A. Proposed Requirement To Include Investment Advisers in the General 
Definition of Financial Institution and To Require Advisers To File 
CTRs and Comply With the Recordkeeping and Travel Rules

    FinCEN requests comment on the inclusion of investment advisers in 
the general definition of financial institution at 31 CFR 1010.100(t). 
In particular:
     With regard to requiring investment advisers to comply 
with the Recordkeeping and Travel Rules and other related recordkeeping 
requirements and the anticipated impact of subjecting advisers to these 
requirements, what are the anticipated time and monetary savings that 
could result from replacing the requirement to file reports on Form 
8300 with a requirement to file CTRs?
     Is there any information that law enforcement, tax, 
regulatory, and counter-terrorism investigations may possibly lose 
because investment advisers would be filing CTRs as opposed to filing 
Form 8300s?

B. Proposed AML Program Requirement

    FinCEN requests comment on all aspects of the proposed AML program 
requirement for investment advisers. In particular:
     Is the proposed rule's approach of requiring an investment 
adviser to include in its AML program requirement all of the advisory 
services it provides, whether acting as the primary adviser or a 
subadviser, an appropriate approach?
     Is the risk-based nature of the proposed AML program 
requirement sufficiently flexible to permit an investment adviser to 
develop and implement an AML program without providing specific 
exclusions for certain advisory activity?

C. Proposed Minimum Requirements of the AML Program

    FinCEN seeks comment on the minimum requirements an investment

[[Page 52694]]

adviser would be required to include in its AML program as proposed in 
Sec.  1031.210(b). In particular:
     Is it appropriate to allow an adviser to delegate some 
elements of its compliance program to an entity with which the client, 
and not the adviser, has the contractual relationship?
     Is it appropriate for FinCEN to expect an investment 
adviser to include in its AML program all advisory services that an 
adviser may provide to non-pooled investment vehicle clients (e.g., 
individuals and institutions), registered open-end fund clients, 
registered closed-end fund clients, private fund/other unregistered 
pooled investment vehicle clients, and wrap fee programs?
     To what extent would a subadviser's AML program overlap 
with the primary adviser's AML program and how could any possible 
duplication of effort be mitigated?
     Is there an increased risk for such a subadviser to be 
used for money laundering, terrorist financing, or other illicit 
activity when providing advisory services to a client that has a 
primary adviser that is not an investment adviser?
     Should the primary adviser be required to apply the same 
approach when the investing pooled entity is a registered investment 
company, such as a mutual fund or closed-end fund?
     Should a subadviser to a private fund or other 
unregistered pooled investment vehicle, which has a primary adviser 
that is not an investment adviser, be required to establish the same 
policies and procedures as when the primary adviser is an investment 
adviser?
     If an underlying investor in the private fund or other 
unregistered pooled investment vehicle is an investing pooled entity, 
should a subadviser be required to identify risks and incorporate 
policies and procedures within its AML program to mitigate the risks of 
the investing pooled entity's underlying investors, sponsoring entity, 
and/or intermediaries when there is an increased risk of money 
laundering, terrorist financing, or other illicit activity?
     Is an express exclusion for advisory activity provided to 
an open-end or closed-end fund appropriate to reduce potential overlap 
or redundancy?
     With respect to a mutual fund's omnibus accounts, are the 
money laundering or terrorist financing risks mitigated because the 
fund is required to assess the risks posed by its own particular 
omnibus accounts?
     Should an adviser to a wrap fee program be required to 
obtain additional information about the investors in the program and/or 
coordinate its review with the sponsoring broker-dealer when the 
adviser sees an increased risk for money laundering, terrorist 
financing, or other illicit activity?
    FinCEN seeks comment on the money laundering program requirements 
as proposed in Sec.  1031.210(b)(2) through (4).

D. Proposed Suspicious Activity Reporting Rule

    FinCEN seeks comment on all aspects of today's suspicious activity 
reporting rule as proposed in Sec.  1031.320. In particular:
     Should investment advisers be permitted to share SARs 
within their corporate organizational structure in the same way that 
banks, broker-dealers in securities, futures commission merchants, 
mutual funds, and introducing brokers in commodities are permitted to 
share? How would such sharing be consistent with the purposes of the 
BSA and how would investment advisers be able to maintain the 
confidentiality of shared SARs?

E. Future Consideration of Additional BSA Requirements for Investment 
Advisers

     Should investment advisers be required to comply with 
other FinCEN rules implementing the BSA, including the rules requiring 
customer identification and verification procedures pursuant to section 
326 of the USA PATRIOT Act and the correspondent account rules of 
section 311 and 312 of the USA PATRIOT Act?
     Should investment advisers be required to comply with 
FinCEN rules implementing section 313 and 319(b) of the USA PATRIOT 
Act?
    The regulations implementing section 326 require certain financial 
institutions to implement reasonable customer identification procedures 
for: (1) Verifying the identity of any person seeking to open an 
account, to the extent reasonable and practicable; and (2) maintaining 
records of the information used to verify the person's identity, 
including name, address, and other identifying information.\87\ The 
regulations implementing section 311 require U.S. financial 
institutions to take certain ``special measures'' against foreign 
jurisdictions, institutions, classes of transactions, or types of 
accounts the Treasury designates as a ``primary money laundering 
concern.'' \88\ The regulations implementing section 312 require a U.S. 
financial institution to perform due diligence and, in some cases, 
enhanced due diligence, with regard to correspondent accounts 
established or maintained for foreign financial institutions and 
private banking accounts established or maintained for non-U.S. 
persons.\89\
---------------------------------------------------------------------------

    \87\ See, e.g., 31 CFR 1020.220, 1023.220, 1024.220, and 
1026.220.
    \88\ See, e.g., 31 CFR 1010.653.
    \89\ See, e.g., 31 CFR 1020.610-620, 1023.610-620, 1024.610-620, 
and 1026.610-620.
---------------------------------------------------------------------------

    The regulations implementing section 313 prohibit certain financial 
institutions from providing correspondent accounts to foreign shell 
banks, and require such financial institutions to take reasonable steps 
to ensure that correspondent accounts provided to foreign banks are not 
used to indirectly provide banking services to foreign shell banks.\90\ 
The regulations implementing section 319(b) require these financial 
institutions that provide correspondent accounts to foreign banks to 
maintain records of the ownership of such foreign banks and their 
agents in the United States designated for legal service of process for 
records regarding these correspondent accounts, and require the 
termination of correspondent accounts of foreign banks that fail to 
comply with or fail to contest a lawful request of the Secretary of the 
Treasury or the Attorney General of the United States.
---------------------------------------------------------------------------

    \90\ See, e.g., 31 CFR 1020.630, 1023.630, 1024.630, and 
1026.630.
---------------------------------------------------------------------------

VI. Regulatory Analysis

A. Executive Orders 13563 and 12866

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility. It 
has been determined that this proposed rule is designated a 
``significant regulatory action'' although not economically 
significant, under section 3(f) of Executive Order 12866. Accordingly, 
this proposed rule will be reviewed by the Office of Management and 
Budget (``OMB'').

B. Regulatory Flexibility Act

    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (``RFA'') requires the agency to ``prepare and make 
available for public comment'' an ``initial regulatory

[[Page 52695]]

flexibility analysis'' (``IRFA'') which will ``describe the impact of 
the proposed rule on small entities.'' 5 U.S.C. 603(a). Section 605 of 
the RFA allows an agency to certify a rule, in lieu of preparing an 
analysis, if the proposed rulemaking is not expected to have a 
significant economic impact on a substantial number of small entities.
    After consultation with the Small Business Administration's Office 
of Advocacy, FinCEN is proposing to define the term small entity in 
accordance with definitions obtained from SEC rules implementing the 
Advisers Act and information obtained from the Investment Adviser 
Registration Depository (``IARD''),\91\ in lieu of using the Small 
Business Administration's definition.\92\ FinCEN requests comment on 
the appropriateness of using the SEC's definition of small entity.
---------------------------------------------------------------------------

    \91\ See 17 CFR 275.0-7 (small entities defined under the 
Investment Advisers Act for purposes of the RFA).
    \92\ 13 CFR 121.201.
---------------------------------------------------------------------------

    Relying on the SEC's definition has the benefit of ensuring 
consistency in the categorization of small entities for SEC 
examiners,\93\ as well as providing the advisory industry with a 
uniform standard. In addition, FinCEN's proposed use of the SEC's 
definition of small entity will have no material impact upon the 
application of these proposed rules to the advisory industry.
---------------------------------------------------------------------------

    \93\ FinCEN is proposing to amend section 1010.810 to include 
investment advisers within the list of financial institutions that 
the SEC would examine for compliance with the BSA's implementing 
regulations. Supra section IV.B.
---------------------------------------------------------------------------

    The SEC defines an entity as a small adviser if it: (1) Has assets 
under management having a total value of less than $25 million; (2) did 
not have total assets of $5 million or more on the last day of its most 
recent fiscal year; and (3) does not control, is not controlled by, and 
is not under common control with another investment adviser that has 
assets under management of $25 million or more, or any person (other 
than a natural person) that had total assets of $5 million or more on 
the last day of its most recent fiscal year.\94\ The proposed rules 
would define investment adviser as any person who is registered or 
required to register with the SEC under section 203 of the Advisers 
Act.\95\ Generally speaking, only large advisers, having $100 million 
or more in regulatory assets under management, are required to 
registers with the SEC,\96\ and only those that do will fall within the 
ambit of these proposals. The Small Business Administration, on the 
other hand, defines a provider of ``investment advice'' to be a small 
entity as having ``annual receipts'' of $38.5 million,\97\ which is 
still significantly below the $100 million threshold for registration.
---------------------------------------------------------------------------

    \94\ Rule 0-7(a) [17 CFR 275.0-7(a)].
    \95\ 15 U.S.C. 80b et seq.
    \96\ 17 CFR 275.203A-1(a)(1).
    \97\ 13 CFR 121.201.
---------------------------------------------------------------------------

    Based on IARD data, the SEC estimates that as of June 2, 2014, 
approximately 11,235 investment advisers were registered with the 
SEC.\98\ To determine how many of the 11,235 advisers are small 
entities for purposes of the RFA, FinCEN is adopting the SEC's 
definition of a small adviser. The SEC estimates that there are about 
464 investment advisers registered that would be considered small 
entities. The SEC also estimates that the total number of small 
investment advisers is about 18,035.\99\ Therefore, FinCEN estimates 
that the proposed rule will affect 4% of registered small investment 
advisers. FinCEN has determined that the proposed rule will not affect 
a substantial number of small entities.
---------------------------------------------------------------------------

    \98\ See infra note 100.
    \99\ The SEC's estimates of the number of investment advisers 
that would be considered small entities and the number of small 
investment advisers is based on IARD data as of June 2, 2014.
---------------------------------------------------------------------------

    Investment advisers' services can be a substitute for investment 
services and products offered by other financial institutions 
designated as financial institutions under the BSA, such as mutual 
funds, broker-dealers in securities, banks, or insurance companies. 
Moreover, investment advisers managing client assets work closely with 
other BSA-defined financial institutions. The rules being proposed 
today address vulnerabilities in the U.S. financial system. If 
investment advisers are not required to establish AML or suspicious 
activity reporting programs, they are at risk of attracting money 
launderers attempting to seek access to the United States financial 
system through an institution that offers financial services that is 
not required to maintain such programs. Requiring investment advisers 
to file CTRs and comply with the Recordkeeping and Travel Rules and the 
other recordkeeping requirements of FinCEN's rules implementing the BSA 
will also deter money launderers from using investment advisers. 
Lastly, by requiring investment advisers to establish AML programs and 
file reports of suspicious activity and comply with the other rules 
being proposed today, investment advisers and other financial 
institutions subject to FinCEN's regulations would be operating under 
similar regulatory burdens.
    The proposed rule would require investment advisers to develop and 
implement a written risk-based AML program. FinCEN believes that the 
flexibility incorporated into the proposed AML program rule would 
permit each investment adviser to tailor its AML program to fit its 
particular size and risk exposure. For example, having recognized that 
the size of a financial institution does not correlate with its risks 
for money laundering and terrorist financing, FinCEN has established 
its AML program rules as risk-based rules rather than ``one-size-fits-
all'' rules. Thus, this proposed rule is inherently flexible. 
Investment advisers are required to develop AML programs that address 
the money laundering and terrorist financing risks of their particular 
advisory business. Accordingly, smaller advisers that provide advisory 
services to clients that may present lower risks for money laundering 
or terrorist financing are not required to develop complex, time-
consuming, or cost-intensive compliance programs. As discussed above, 
some investment advisers have already implemented AML programs pursuant 
to an SEC No-Action letter permitting broker-dealers in securities to 
rely on registered investment advisers to perform some or all aspects 
of broker-dealers' obligations to verify the identity of their 
customers.\100\
---------------------------------------------------------------------------

    \100\ See discussion supra Section IV.D (``Anti-Money Laundering 
Programs'').
---------------------------------------------------------------------------

    Investment advisers are already subject to comprehensive 
regulation, which should ease the cost and burden of complying with 
today's proposed rule. Investment advisers may build on their existing 
risk management procedures and prudential business practices to ensure 
compliance with the proposed rule. Notably, SEC-registered investment 
advisers are subject to the Advisers Act and the SEC rules implementing 
the Advisers Act. The Advisers Act prohibits advisers from engaging in 
a wide range of fraudulent, deceptive, and manipulative conduct. In 
addition to the anti-fraud provisions of the Advisers Act, advisers are 
subject to the anti-fraud and manipulation provisions of the Federal 
securities laws. For example, under Advisers Act Rule 204-2, advisers 
are required to maintain certain books and records, such as a record of 
client holdings, custody records (if applicable), a list of all 
discretionary accounts, all written agreements (or copies) that the 
adviser has entered into with any client, and all written 
communications between the adviser and its clients.\101\ Further, under 
Advisers Act Rule 206(4)-7, advisers are required to adopt and 
implement

[[Page 52696]]

written policies and procedures reasonably designed to prevent 
violation of the Advisers Act and the rules that the SEC has adopted 
under that Act.\102\ Advisers must conduct annual reviews to ensure the 
adequacy and effectiveness of their policies and procedures and must 
designate a chief compliance officer responsible for administering the 
policies and procedures.\103\ Form ADV requires registered investment 
advisers to report to the SEC detailed information regarding their 
advisory activities. Accordingly, FinCEN estimates that the burden of 
the AML program requirement on investment advisers, particularly in 
light of the above mentioned existing compliance requirements under the 
Advisers Act, would not have a significant impact on small entities.
---------------------------------------------------------------------------

    \101\ See 17 CFR 275.204-2.
    \102\ See 17 CFR 275.206(4)-7.
    \103\ Id.
---------------------------------------------------------------------------

    The proposed rule would require investment advisers to report 
suspicious transactions. The proposed rule, however, would not impose a 
significant burden on small advisers. Investment advisers are already 
subject to the anti-fraud and manipulation provisions of the Advisers 
Act and other Federal securities laws. Investment advisers, therefore, 
should already have in place policies and procedures to prevent and 
detect fraud. Such internal controls should help investment advisers 
identify and report suspicious activity. Additionally, investment 
advisers, as part of their client on-boarding procedures may already be 
gathering some of the information required to complete certain parts of 
the SAR form. A review of current SAR filings indicates that the 
securities industry, with a population of approximately 10,000 
entities, files 19,000+ SARs per year.\104\ Acknowledging that the 
majority of reports are filed by larger entities, FinCEN estimates that 
the number of SARs filed by all small investment advisers will be fewer 
than ten per adviser. Therefore, FinCEN estimates that the burden of 
the SAR filing requirement on investment advisers would not have a 
significant impact.
---------------------------------------------------------------------------

    \104\ See FinCEN, SAR Stats, Section 5 (Jan. 2015).
---------------------------------------------------------------------------

    The proposed rule would require investment advisers to file CTRs. 
This requirement in the proposed rule, however, would not impose a 
significant burden on small advisers. Investment advisers are currently 
required to file Form 8300s. As discussed above, investment advisers 
would no longer be required to report transactions involving certain 
negotiable instruments reportable on the Form 8300 but not on the CTR. 
Moreover, FinCEN believes that investment advisers rarely receive cash 
from or provide significant amounts of currency to their clients. The 
proposed rule, therefore, would not impose any additional burden on 
investment advisers but would, in fact, reduce their burden to report 
such transactions.
    The proposed rule would require investment advisers to create and 
retain records for transmittals of funds, and to transmit information 
on these transactions to other financial institutions in the payment 
chain. This requirement in the proposed rule, however, would not impose 
a significant economic impact on small advisers. Any new recordkeeping 
obligations, if not already being performed by investment advisers in 
accordance with other law or as a matter of prudent business practice, 
are likely to be commensurate with the size of the adviser.
    The additional burdens imposed by the proposed rules would be the 
requirements to develop and implement a written AML program, file 
reports on suspicious transactions, file CTRs, and comply with the 
requirements of the Recordkeeping and Travel Rules. As discussed above, 
FinCEN estimates that these requirements would not impact a substantial 
number of small entities. Accordingly, FinCEN certifies that the 
proposed rules would not have a significant economic impact on a 
substantial number of small entities.
Questions for Comment
    FinCEN seeks comment on whether the proposed rules would have a 
significant economic impact on a substantial number of small entities:
    1. Please provide comment on any or all of the provisions in the 
proposed rule with regard to (a) the impact of provision(s) (including 
any benefits and costs), if any, in carrying out the requirements of 
the proposed rule(s) on investment advisers; and (b) alternative 
requirements, if any, FinCEN should consider.
    2. Please provide comment regarding whether the AML program and 
suspicious activity reporting requirements proposed in these 
rulemakings would require small entities to gather any information that 
is not already being gathered as part of other regulatory requirements, 
due diligence, or prudential business practices and provide specific 
example of such information.

C. Paperwork Reduction Act

    The collections of information contained in this proposed rule are 
being submitted to OMB for review in accordance with the Paperwork 
Reduction Act of 1995 (``PRA'').\105\ Comments on the collection of 
information should be sent to Desk Officer for the Department of the 
Treasury, Office of Information and Regulatory Affairs, Office of 
Management and Budget, Paperwork Reduction Project (1506), Washington, 
DC 20503, fax (202-395-6974), or by the Internet to 
[email protected], with a copy to FinCEN by mail or email at 
the addresses previously specified. Comments on the collection of 
information should be received by November 2, 2015.
---------------------------------------------------------------------------

    \105\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

    In accordance with the requirements of the PRA, and its 
implementing regulations, 5 CFR part 1320, the following information 
concerning the collection of information is presented to assist those 
persons wishing to comment on the proposed information collection. The 
information collections in this proposal are contained in 31 CFR 
1010.100(t)(11), 1031.210, 1031.320, 1031.311, 1010.410, and 1031.410; 
the collection of this information pursuant to these sections is 
mandatory.
    AML programs for investment advisers:
    31 CFR 1031.210 (AML programs for investment advisers). Information 
about an investment adviser's AML program would be required to be 
retained pursuant to 31 U.S.C. 5318(h) and proposed 31 CFR 1031.210. 
The information collected would be pursuant to Sec.  1031.210 and would 
be used by FinCEN and the proposed designated examiner, the SEC, to 
determine whether investment advisers comply with the BSA requirement 
to implement AML programs. The collection of information would be 
mandatory.
    Description of Recordkeepers: Investment advisers as defined in 31 
CFR 1010.100(nnn).
    Estimated Number of Recordkeepers: 11,235.\106\
---------------------------------------------------------------------------

    \106\ The proposed rules apply to investment advisers registered 
or required to register with the SEC. Based on IARD data the SEC 
estimates that as of June 2, 2014 there were approximately 11,235 
investment advisers registered with the SEC.
---------------------------------------------------------------------------

    Estimated Average Annual Burden Hours per Recordkeeper: The 
estimated average annual burden associated with the recordkeeping 
requirement proposed under proposed 31 CFR 1031.210 is 3 hours.
    Estimated Total Annual Recordkeeping Burden: FinCEN

[[Page 52697]]

estimates that the annual recordkeeping burden would be 33,705 hours.
    The burden would be included in (added to) the existing burden 
under OMB Control Number 1506-0020 currently titled ``Anti-Money 
Laundering Programs for Money Services Businesses, Mutual Funds, and 
Operators of Credit Card Systems.'' The new title for this control 
number would be ``Anti-Money Laundering Programs for Investment 
Advisers, Money Services Businesses, Mutual Funds, and Operators of 
Credit Card Systems.'' The new total number of recordkeepers for this 
OMB control number would be 266,341 and the new total burden would be 
374,922 hours. Records required to be retained under the BSA and 
FinCEN's implementing regulations must be retained for five years. An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information subject to the PRA unless it 
displays a valid control number assigned by the OMB.
    Reports by investment advisers of suspicious transactions:
    31 CFR 1031.320 (SARs for investment advisers). Information about 
suspicious transactions would be required to be provided pursuant to 31 
U.S.C. 5318(g) and proposed 31 CFR 1031.320. This information would be 
used by FinCEN and law enforcement and regulatory agencies in criminal 
and regulatory investigations or proceedings. The collection of 
information would be mandatory.
    Description of Recordkeepers: Investment advisers as defined in 31 
CFR 1010.100(nnn).
    Estimated Number of Recordkeepers: 11,235.
    Estimated Average Annual Burden Hours per Recordkeeper: The 
estimated average annual burden associated with the recordkeeping 
proposed under 31 CFR 1031.320 is 1 hour for the maintenance of the 
rule. This would be a new requirement that requires a new OMB control 
number 1506-0069.
    Estimated Total Annual Burden: The proposal estimates the annual 
burden would be 22,470 hours, consisting of 1 hour for report 
completion and 1 hour for recordkeeping for a total of 2 hours. This 
burden will be included in (added to) the existing burden under OMB 
control number 1506-0065 currently titled ``Bank Secrecy Act Suspicious 
Activity Reports.''
    Generally, a financial institution that is required to file SARs 
under FinCEN's rules implementing the BSA must report any suspicious 
transaction conducted or attempted by, at, or through the financial 
institution that involves, or aggregates, funds or assets of at least 
$5,000.\107\ The requirement to file SARs at the $5,000 threshold 
(``SAR threshold'') was determined when the SAR rules for banks and 
other depository institutions were promulgated and has been adopted for 
most other financial institutions that have been subsequently required 
to file SARs.\108\ The SAR threshold balances the interests of law 
enforcement and analysts with the reporting burden placed on financial 
institutions. Even though the $5,000 threshold for mandatory SAR filing 
has not changed, the reduction in the real value of the threshold 
adjusted for inflation has been offset by the increased ability of 
financial institutions to monitor for, report, and even preemptively 
stop suspicious transactions in real time with their automated systems. 
A uniform reporting threshold for mandatory SAR filing applicable to 
most financial institutions subject to a SAR rule furthers the 
consistent application of FinCEN's rules by (1) allowing SAR data to be 
analyzed consistently across different financial institutions; and (2) 
subjecting transactions that may be conducted through more than one 
financial institution type, such as an investment adviser that executes 
transactions through a broker-dealer in securities, to be subject to 
the same reporting requirements. Lastly, the SAR rules also encourage a 
financial institution to report voluntarily transactions that, alone or 
in the aggregate, fall below the $5,000 threshold that the financial 
institution believes is relevant to the possible violation of any law 
or regulation.\109\ Because the rule permits the filing of a voluntary 
SAR that does not prescribe a threshold balance, the SAR rule is 
flexible.
---------------------------------------------------------------------------

    \107\ See 31 CFR 1020.320(a), 1021.320(a), 1023.320(a), 
1024.320(a), 1025(a), and 1026.320(a) (requiring banks, casinos, 
broker-dealers in securities, mutual funds, insurance companies, and 
futures commission merchants and introducing brokers in commodities 
to report a suspicious transaction if it involves in the aggregate 
of at least $5,000). See also 31 CFR 1022.320(a)(2) (requiring money 
services businesses (``MSBs'') as described in 31 CFR 
1010.100(ff)(1) and (3) through (7) to report a suspicious 
transaction if it involves in the aggregate of at least $2,000) and 
31 CFR 1022.320(a)(3) (an issuer of money orders or travelers checks 
is required to report a transaction or pattern of transactions only 
if the transactions involve or aggregate funds or other assets of 
$5,000 or more when the transactions required to be reported are 
derived from a review of clearance records or other similar records 
of money orders or travelers checks the MSB has sold or processed). 
A lower threshold for required SAR reporting was established for 
MSBs because of the nature of the MSB business and the generally 
lower dollar amounts associated with the transactions in which they 
engage. FinCEN has asked for and received comment in proposed rules 
issued in the past as to whether a change in the threshold dollar 
amount for SARs filed by MSBs is warranted. After consideration of 
comments received, FinCEN has determined that the $2,000 threshold 
for MSBs as prescribed in 31 CFR 1022.320(a)(2) remains appropriate.
    \108\ See Amendment to the Bank Secrecy Act; Requirement To 
Report Suspicious Transactions, 61 FR 4326, 4328 (Feb. 5, 1996); 
Minimum Security Devices and Procedures, Reports of Suspicious 
Activities, and Bank Secrecy Act Compliance Program, 61 FR 4332, 
4333 (Feb. 5, 1996); Membership of State Banking Institutions in the 
Federal Reserve System; International Banking Operations; Bank 
Holding Companies and Change in Control; Reports of Suspicious 
Activities Under Bank Secrecy Act, 61 FR 4338, 4341 (Feb. 5 1996); 
Amendment to the Bank Secrecy Act; Requirement To Report Suspicious 
Transactions, 61 FR 6096, 6098 (Feb. 16, 1996); Suspicious Activity 
Reports, 61 FR 6095, 6097 (Feb. 16, 1996); and Operations-Suspicious 
Activity Reports and Other Reports and Statements, 61 FR 6100, 6101 
(Feb. 16, 1996). FinCEN's rule requiring banks and other depository 
institutions to report suspicious activity was issued in 
coordination with the Office of the Comptroller of the Currency 
(``OCC''), the Board of Governors of the Federal Reserve System, the 
Office of Thrift Supervision (``OTS''), and the Federal Deposit 
Insurance Corporation. As of July 21, 2011, the OTS is part of the 
OCC.
    \109\ See 31 CFR 1020.320(a), 1021.320(a), 1022.320(a), 
1023.320(a), 1024.320(a), 1025(a), and 1026.320(a).
---------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information subject to the PRA unless it 
displays a valid control number assigned by the OMB. The title for this 
control number will be ``Suspicious Activity Reports by Investment 
Advisers, (31 CFR 1031.320).'' The administrative burden for the new 
OMB number will be 1 hour. The burden for the recordkeeping and 
reporting requirement is added to existing OMB control number 1506-0065 
(Bank Secrecy Act Suspicious Activity Report (BSAR)). The new total 
number of responses for OMB control number 1506-0065 would be 
1,653,395. The new total burden for OMB control number 1506-0065 would 
be 3,306,790 hours. Records required to be retained under FinCEN's 
regulations implementing the BSA must be retained for five years.
    CTR Filing Requirements for Investment Advisers
    31 CFR 1031.311 (Filing obligations for reports of transactions in 
currency). This information would be required to be retained pursuant 
to 31 U.S.C. 5313, 31 CFR 1010.311, and proposed 31 CFR 1031.311. This 
information would be used by FinCEN and law enforcement and regulatory 
agencies in criminal and regulatory investigations or proceedings. The 
collection of information would be mandatory.
    Description of Recordkeepers: Investment advisers as defined in 31 
CFR 1010.100(t)(11).
    Estimated Number of Recordkeepers: 11,235.

[[Page 52698]]

    Estimated Average Annual Burden Hours per Recordkeeper: The 
estimated average annual burden associated with the collection of 
information proposed under 31 CFR 1031.311 would be 1 hour.\110\
---------------------------------------------------------------------------

    \110\ The single assigned hour is established to maintain the 
requirement. The reporting, recordkeeping, and record retention is 
accounted for under OMB control number 1506-0064 (BCTR).
---------------------------------------------------------------------------

    Estimated Total Annual Burden: FinCEN estimates that the total 
annual recordkeeping and reporting burden would be 11,235 hours.\111\
---------------------------------------------------------------------------

    \111\ While it is not industry practice for investment advisers 
to accept cash, there is no regulation that prohibits investment 
advisers from accepting cash. Therefore, for purposes of estimating 
the annual burden the filing of CTRs will have on covered investment 
advisers, FinCEN estimates that each covered investment adviser will 
file one CTR per year.
---------------------------------------------------------------------------

    This burden will be included in (added to) the existing burden 
under OMB Control Number 1506-0064 currently titled ``Bank Secrecy Act 
Currency Transaction Reports (BCTR).'' The new total number of 
responses for OMB Control Number 1506-0064 would be 14,114,305. The new 
total burden for OMB Control Number 1506-0064 would be 9,409,536 hours. 
Records required to be retained under FinCEN's regulations implementing 
the BSA must be retained for five years.
    Generally, a financial institution required to file CTRs under 
FinCEN's rules implementing the BSA must report any currency 
transaction for over $10,000 that is conducted by, through, or to the 
financial institution, as well as treat as a single transaction, 
multiple currency transactions that the financial institution knows are 
on behalf of one person that, in the aggregate total over $10,000 
during any one business day.\112\ The reporting by financial 
institutions of transactions in currency in excess of $10,000 is a 
major component of FinCEN's regulations implementing the BSA. The 
reporting requirement is issued under the broad authority granted to 
the Secretary under 31 U.S.C. 5313(a) to require reports of domestic 
coins and currency transactions. The CTR tracks the movement of 
currency into and out of financial institutions.\113\ The $10,000 
threshold balances the interests of law enforcement and analysts with 
the reporting burden placed on financial institutions. The threshold 
has remained unchanged because the reduction in the real value of the 
$10,000 threshold adjusted for inflation has been offset by the 
reduction in the use of currency as a medium of exchange due to the 
increased usage of electronic payment mechanisms, such as credit, 
debit, prepaid, and ACH transactions. In 2008, the Government 
Accountability Office (``GAO'') conducted a study that looked at, in 
part, the CTR thresholds. Based on its study, the GAO recommended 
keeping the CTR threshold at $10,000 for the reasons discussed above 
and on the recommendation of various Federal, State, and local law 
enforcement agencies. The $10,000 threshold applies across all 
financial institutions that are required to file CTRs. Moreover, a 
uniform CTR threshold is appropriate because the money laundering risks 
presented by these types of transactions, and which the CTR is designed 
to capture, are not differentiated by financial institution type, but 
rather are inherent to the transactions themselves because of the large 
amounts of currency involved with such transactions. A uniform 
reporting threshold for CTR filing requirements furthers the consistent 
application of FinCEN's rules by (1) allowing CTR data to be analyzed 
consistently across different financial institutions and non-financial 
trades and businesses (``NFTBs''); and (2) subjecting reportable 
transactions that are conducted through more than one financial 
institution type, such as an investment adviser that executes 
transactions through a broker-dealer in securities, to be subject to 
the same reporting requirements. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
subject to the PRA unless it displays a valid control number assigned 
by the OMB.
---------------------------------------------------------------------------

    \112\ See discussion supra Section IV.C.1 (``Investment 
Advisers' Obligation to File Currency Transactions Reports Replaces 
Obligation to File Form 8300'').
    \113\ The $10,000 threshold of the CTR requirement mirrors the 
reporting thresholds of other requirements under FinCEN's rules 
implementing the BSA, such as: (1) The requirement that all persons 
who receive currency in excess of $10,000 in the course of a trade 
or business report such transactions (``non-financial trades and 
businesses'' or ``NFTBs''); and (2) the requirement that all persons 
report the international transportation of monetary instruments in 
excess of $10,000, referred to as the ``Form 8300'' and ``CMIR'' 
respectively. See 31 CFR 1010.330 and 1010.340. The Form 8300 
requires the reporting of large amounts of currency within the 
United States; the CMIR requires the reporting of large amounts of 
currency into and out of the United States. Similar to the SAR and 
CTR requirements, the thresholds for Form 8300 and the CMIR were 
determined when the rules for these reporting requirements were 
promulgated.
---------------------------------------------------------------------------

Questions for Comment
    1. We seek comment on FinCEN's three-hour estimate for the 
establishment of an AML program per investment adviser. Is the estimate 
of three hours per year accurate and if not, what is a recordkeeping 
estimate that more accurately reflects the time an investment adviser 
would need to establish an AML program. We also seek comment regarding 
the estimated costs associated with establishing an AML program, 
specifically with regard to systems and labor costs.
    2. We seek comment on FinCEN's annual three-hour estimate for the 
SAR recordkeeping and reporting requirement per investment adviser. Is 
the estimate of three hours per year accurate, and if not, what is a 
recordkeeping and reporting requirement estimate that more accurately 
reflects the time an investment adviser would need to fulfill the SAR 
recordkeeping and reporting requirement. We also seek comment regarding 
the estimated start-up costs and costs of operation to maintain SARs.
    3. We seek comment on FinCEN's average annual estimate of one hour 
of recordkeeping and reporting per CTR per investment adviser. Is 
FinCEN's estimate of the burden of the proposed collection of 
information accurate? FinCEN seeks comment on whether the proposed 
collection of information is necessary for the proper performance of 
the mission of FinCEN, including whether the information will have 
practical utility. Are there ways to minimize the burden of the 
required collection of information, including through the use of 
automated collection techniques or other forms of information 
technology? Finally, FinCEN seeks comment regarding the estimated 
start-up costs and costs of operation, maintenance, and purchase of 
services to maintain the collected information.

D. Unfunded Federal Mandates Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded 
Mandates Act''), Public Law 104-4 (March 22, 1995), requires that an 
agency prepare a budgetary impact statement before promulgating a rule 
that may result in expenditure by the State, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 202 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. Taking into account the 
factors noted above and using conservative estimates of average labor 
costs in evaluating the cost of the burden imposed by the proposed 
regulation, FinCEN has determined that it is not required to prepare a 
written statement under section 202.

[[Page 52699]]

List of Subjects in 31 CFR Parts 1010 and 1031

    Administrative practice and procedure, Anti-money laundering, 
Banks, Banking, Brokers, Brokerage, Investment advisers, Money 
laundering, Mutual funds, Report and recordkeeping requirements, 
Securities, Suspicious transactions, Terrorism, Terrorist financing.

Authority and Issuance

    For the reasons set forth in the preamble, chapter X of title 31 of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 1010--GENERAL PROVISIONS

0
1. The authority citation for part 1010 continues to read as follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307.

0
2. Amend Sec.  1010.100 by:
0
a. Removing the word ``or'' at the end of paragraph (t)(9);
0
b. Removing the period at the end of paragraph (t)(10), and in its 
place adding the words ``; or''; and
0
c. Adding paragraphs (t)(11) and (nnn).
    The additions read as follows:


Sec.  1010.100  General definitions.

* * * * *
    (t)(11) An investment adviser.
* * * * *
    (nnn) Investment adviser. Any person who is registered or required 
to register with the SEC under section 203 of the Investment Advisers 
Act of 1940 (15 U.S.C. 80b-3(a)).
0
3. Amend Sec.  1010.410 by:
0
a. Removing the word ``or'' at the end of paragraphs (e)(6)(i)(H) and 
(I);
0
b. Removing the word ``and'' at the end of paragraph (e)(6)(i)(J) and 
in its place adding the words ``; or''; and
0
c. Adding paragraph (e)(6)(i)(K).
    The additions read as follows:


Sec.  1010.410  Records to be made and retained by financial 
institutions.

* * * * *
    (e) * * *
    (6) * * *
    (i) * * *
    (K) An investment adviser; and
0
4. Amend Sec.  1010.810 by revising paragraph (b)(6) to read as 
follows:


Sec.  1010.810  Enforcement.

* * * * *
    (b) * * *
    (6) To the Securities and Exchange Commission with respect to 
brokers and dealers in securities, investment advisers, and investment 
companies as that term is defined in the Investment Company Act of 1940 
(15 U.S.C. 80a-1 et seq.);
0
5. Add part 1031 to read as follows:

PART 1031--RULES FOR INVESTMENT ADVISERS

Subpart A--Definitions
Sec.
1031.100 Definitions.
Subpart B--Programs
1031.200 General.
1031.210 Anti-money laundering programs for investment advisers.
1031.220 [Reserved]
Subpart C--Reports Required To Be Made by Investment Advisers
1031.300 General.
1031.310 Reports of transactions in currency.
1031.311 Filing obligations.
1031.312 Identification required.
1031.313 Aggregation.
1031.314 Structured transactions.
1031.315 Exemptions.
1031.320 Reports by investment advisers of suspicious transactions.
Subpart D--Records Required To Be Maintained by Investment Advisers
1031.400 General.
1031.410 Recordkeeping.
Subpart E--Special Information Sharing Procedures To Deter Money 
Laundering and Terrorist Activity
1031.500 General.
1031.520 Special information sharing procedures to deter money 
laundering and terrorist activity for investment advisers.
1031.530 [Reserved]
1031.540 Voluntary information sharing among financial institutions.
Subpart F--Special Standards of Diligence; Prohibitions, and Special 
Measures for Investment Advisers
1031.600 [Reserved]
1031.610 [Reserved]
1031.620 [Reserved]
1031.630 [Reserved]
1031.640 [Reserved]
1031.670 [Reserved]

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307.

Subpart A--Definitions


Sec.  1031.100  Definitions.

    Refer to Sec.  1010.100 of this chapter for general definitions not 
noted herein.

Subpart B--Programs


Sec.  1031.200  General.

    Investment advisers are subject to the program requirements set 
forth and cross referenced in this subpart. Investment advisers should 
also refer to subpart B of part 1010 of this chapter for program 
requirements contained in that subpart that apply to investment 
advisers.


Sec.  1031.210  Anti-money laundering programs for investment advisers.

    (a)(1) Each investment adviser shall develop and implement a 
written anti-money laundering program reasonably designed to prevent 
the investment adviser from being used for money laundering or the 
financing of terrorist activities and to achieve and monitor compliance 
with the applicable provisions of the Bank Secrecy Act (31 U.S.C. 5311 
et seq.) and the implementing regulations thereunder.
    (2) Each investment adviser's anti-money laundering program must be 
approved in writing by its board of directors or trustees, or if it 
does not have one, by its sole proprietor, general partner, trustee, or 
other persons that have functions similar to a board of directors. An 
investment adviser shall make its anti-money laundering program 
available for inspection by FinCEN or the SEC upon request.
    (b) Minimum requirements. The anti-money laundering program shall 
at a minimum:
    (1) Establish and implement policies, procedures, and internal 
controls reasonably designed to prevent the investment adviser from 
being used for money laundering or the financing of terrorist 
activities and to achieve and monitor compliance with the applicable 
provisions of the Bank Secrecy Act and the implementing regulations 
thereunder;
    (2) Provide for independent testing for compliance to be conducted 
by the investment adviser's personnel or by a qualified outside party;
    (3) Designate a person or persons responsible for implementing and 
monitoring the operations and internal controls of the program; and
    (4) Provide ongoing training for appropriate persons.
    (c) Effective date. An investment adviser must develop and 
implement an anti-money laundering program that complies with the 
requirements of this section on or before [DATE SIX MONTHS FROM THE 
EFFECTIVE DATE OF THE FINAL RULE].


Sec.  1031.220  [Reserved]

Subpart C--Reports Required To Be Made by Investment Advisers


Sec.  1031.300  General.

    Investment advisers are subject to the program requirements set 
forth and cross referenced in this subpart. Investment advisers should 
also refer to subpart C of part 1010 of this chapter for

[[Page 52700]]

program requirements contained in that subpart that apply to investment 
advisers.


Sec.  1031.310  Reports of transactions in currency.

    The reports of transactions in currency requirements for investment 
advisers are located in subpart C of part 1010 of this chapter.


Sec.  1031.311  Filing obligations.

    Refer to Sec.  1010.311 of this chapter for reports of transactions 
in currency filing obligations for investment advisers.


Sec.  1031.312  Identification required.

    Refer to Sec.  1010.312 of this chapter for identification 
requirements for reports of transactions in currency filed by 
investment advisers.


Sec.  1031.313  Aggregation.

    Refer to Sec.  1010.313 of this chapter for reports of transactions 
in currency aggregation requirements for investment advisers.


Sec.  1031.314  Structured transactions.

    Refer to Sec.  1010.314 of this chapter for rules regarding 
structured transactions for investment advisers.


Sec.  1031.315  Exemptions.

    Refer to Sec.  1010.315 of this chapter for exemptions from the 
obligation to file reports of transactions for investment advisers.


Sec.  1031.320  Reports by investment advisers of suspicious 
transactions.

    (a) General. (1) Every investment adviser shall file with FinCEN, 
to the extent and in the manner required by this section, a report of 
any suspicious transaction relevant to a possible violation of law or 
regulation. An investment adviser may also file with FinCEN a report of 
any suspicious transaction that it believes is relevant to the possible 
violation of any law or regulation, but whose reporting is not required 
by this section. Filing a report of a suspicious transaction does not 
relieve an investment adviser from the responsibility of complying with 
the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) or any 
regulation imposed by the Securities and Exchange Commission.
    (2) A transaction requires reporting under this section if it is 
conducted or attempted by, at, or through an investment adviser; it 
involves or aggregates funds or other assets of at least $5,000; and 
the investment adviser knows, suspects, or has reason to suspect that 
the transaction (or a pattern of transactions of which the transaction 
is a part):
    (i) Involves funds derived from illegal activity or is intended or 
conducted in order to hide or disguise funds or assets derived from 
illegal activity (including, without limitation, the ownership, nature, 
source, location, or control of such funds or assets) as part of a plan 
to violate or evade any Federal law or regulation or to avoid any 
transaction reporting requirement under Federal law or regulation;
    (ii) Is designed, whether through structuring or other means, to 
evade any requirements of this part or any other regulations 
promulgated under the Bank Secrecy Act;
    (iii) Has no business or apparent lawful purpose or is not the sort 
in which the particular customer would normally be expected to engage, 
and the investment adviser knows of no reasonable explanation for the 
transaction after examining the available facts, including the 
background and possible purpose of the transaction; or
    (iv) Involves use of the investment adviser to facilitate criminal 
activity.
    (3) More than one investment adviser may have an obligation to 
report the same transaction under this section, and other financial 
institutions may have separate obligations to report suspicious 
activity with respect to the same transaction pursuant to other 
provisions of this part. In those instances, no more than one report is 
required to be filed by the investment adviser(s) and other financial 
institution(s) involved in the transaction, provided that the report 
filed contains all relevant facts, including the name of each financial 
institution and the words ``joint filing'' in the narrative section, 
and each institution maintains a copy of the report filed, along with 
any supporting documentation.
    (b) Filing and notification procedures--(1) What to file. A 
suspicious transaction shall be reported by completing a Suspicious 
Activity Report (``SAR''), and collecting and maintaining supporting 
documentation as required by paragraph (c) of this section.
    (2) Where to file. The SAR shall be filed with FinCEN in accordance 
with the instructions to the SAR.
    (3) When to file. A SAR shall be filed no later than 30 calendar 
days after the date of the initial detection by the reporting 
investment adviser that may constitute a basis for filing a SAR under 
this section. If no suspect is identified on the date of such initial 
detection, an investment adviser may delay filing a SAR for an 
additional 30 calendar days to identify a suspect, but in no case shall 
reporting be delayed more than 60 calendar days after the date of such 
initial detection.
    (4) Mandatory notification to law enforcement. In situations 
involving violations that require immediate attention, such as 
suspected terrorist financing or ongoing money laundering schemes, an 
investment adviser shall immediately notify by telephone an appropriate 
law enforcement authority in addition to filing timely a SAR.
    (5) Voluntary notification to FinCEN. Any investment adviser 
wishing voluntarily to report suspicious transactions that may relate 
to terrorist activity may call FinCEN's Resource Center (FRC) in 
addition to filing timely a SAR if required by this section.
    (c) Retention of records. An investment adviser shall maintain a 
copy of any SAR filed by the investment adviser or on its behalf 
(including joint reports), and the original (or business record 
equivalent) of any supporting documentation concerning any SAR that it 
files (or is filed on its behalf) for a period of five years from the 
date of filing the SAR. Supporting documentation shall be identified as 
such and maintained by the investment adviser, and shall be deemed to 
have been filed with the SAR. The investment adviser shall make all 
supporting documentation available upon request to FinCEN, or Federal, 
State, or local law enforcement agency, or any Federal regulatory 
authority that examines the investment adviser for compliance with the 
Bank Secrecy Act.
    (d) Confidentiality of SARs. A SAR, and any information that would 
reveal the existence of a SAR, are confidential and shall not be 
disclosed except as authorized in this paragraph (d). For purposes of 
this paragraph (d) only, a SAR shall include any suspicious activity 
report filed with FinCEN pursuant to any regulation in this part.
    (1) Prohibition on disclosures by investment advisers--(i) General 
rule. No investment adviser, and no director, officer, employee, or 
agent of any investment adviser, shall disclose a SAR or any 
information that would reveal the existence of a SAR. Any investment 
adviser, and any director, officer, employee, or agent of any 
investment adviser that is subpoenaed or otherwise requested to 
disclose a SAR or any information that would reveal the existence of a 
SAR, shall decline to produce the SAR or such information, citing this 
section and 31 U.S.C. 5318(g)(2)(A)(i), and shall notify FinCEN of any 
such request and the response thereto.
    (ii) Rules of construction. Provided that no person involved in any 
reported suspicious transaction is notified that

[[Page 52701]]

the transaction has been reported, paragraph (d)(1) shall not be 
construed as prohibiting:
    (A) The disclosure by an investment adviser, or any director, 
officer, employee, or agent of an investment adviser of:
    (1) A SAR, or any information that would reveal the existence of a 
SAR, to FinCEN or any Federal, State, or local law enforcement agency, 
or any Federal regulatory authority that examines the investment 
adviser for compliance with the Bank Secrecy Act; or
    (2) The underlying facts, transactions, and documents upon which a 
SAR is based, including but not limited to disclosures to another 
financial institution, or any director, officer, employee, or agent of 
a financial institution, for the preparation of a joint SAR; or
    (B) The sharing by an investment adviser, or any director, officer, 
employee, or agent of the investment adviser, of a SAR, or any 
information that would reveal the existence of a SAR, within the 
investment adviser's corporate organizational structure for purposes 
consistent with Title II of the Bank Secrecy Act as determined by 
regulation or in guidance.
    (2) Prohibition on disclosures by government authorities. A 
Federal, State, local, territorial, or tribal government authority, or 
any director, officer, employee, or agent of any of the foregoing, 
shall not disclose a SAR, or any information that would reveal the 
existence of a SAR, except as necessary to fulfill official duties 
consistent with Title II of the Bank Secrecy Act. For purposes of this 
section, official duties shall not include the disclosure of a SAR, or 
any information that would reveal the existence of a SAR, to a non-
governmental entity in response to a request for disclosure of non-
public information or a request for use in a private legal proceeding, 
including a request pursuant to 31 CFR 1.11.
    (e) Limitation on liability. An investment adviser, and any 
director, officer, employee, or agent of any investment adviser, that 
makes a voluntary disclosure of any possible violation of law or 
regulation to a government agency or makes a disclosure pursuant to 
this section or any other authority, including a disclosure made 
jointly with another institution, shall be protected from liability for 
any such disclosure, or for failure to provide notice of such 
disclosure to any person identified in the disclosure, or both, to the 
full extent provided by 31 U.S.C. 5318(g)(3).
    (f) Compliance. Investment advisers shall be examined by FinCEN or 
its delegates under the terms of the Bank Secrecy Act, for compliance 
with this section. Failure to satisfy the requirements of this section 
may be a violation of the Bank Secrecy Act and of this part.
    (g) Applicability date. This section applies to transactions 
occurring after full implementation of an anti-money laundering program 
required by Sec.  1031.210.

Subpart D--Records Required To Be Maintained by Investment Advisers


Sec.  1031.400  General.

    Investment advisers are subject to the recordkeeping requirements 
set forth and cross referenced in this subpart. Investment advisers 
should also refer to subpart D of part 1010 of this chapter for 
recordkeeping requirements contained in that subpart which apply to 
investment advisers.


Sec.  1031.410  Recordkeeping.

    Refer to Sec.  1010.410 of this chapter.

Subpart E--Special Information Sharing Procedures To Deter Money 
Laundering and Terrorist Activity


Sec.  1031.500  General.

    Investment advisers are subject to the special information sharing 
procedures to deter money laundering and terrorist activity 
requirements set forth and cross referenced in this subpart. Investment 
advisers should also refer to subpart E of part 1010 of this chapter 
for special information sharing procedures to deter money laundering 
and terrorist activity contained in that subpart which apply to 
investment advisers.


Sec.  1031.520  Special information sharing procedures to deter money 
laundering and terrorist activity for investment advisers.

    (a) Refer to Sec.  1010.520 of this chapter.
    (b) [Reserved]


Sec.  1031.530  [Reserved]


Sec.  1031.540  Voluntary information sharing among financial 
institutions.

    (a) Refer to Sec.  1010.540 of this chapter.
    (b) [Reserved]

Subpart F--Special Standards of Diligence; Prohibitions; and 
Special Measures for Investment Advisers


Sec.  1031.600  [Reserved]


Sec.  1031.610  [Reserved]


Sec.  1031.620  [Reserved]


Sec.  1031.630  [Reserved]


Sec.  1031.640  [Reserved]


Sec.  1031.670  [Reserved]

    Dated: August 24, 2015.
Jennifer Shasky Calvery
Director, Financial Crimes Enforcement Network.
[FR Doc. 2015-21318 Filed 8-31-15; 8:45 am]
BILLING CODE 4810-02-P