[Federal Register Volume 89, Number 32 (Thursday, February 15, 2024)]
[Proposed Rules]
[Pages 12108-12193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02854]
[[Page 12107]]
Vol. 89
Thursday,
No. 32
February 15, 2024
Part V
Department of the Treasury
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Financial Crimes Enforcement Network
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31 CFR Parts 1010 and 1032
Financial Crimes Enforcement Network: Anti-Money Laundering/Countering
the Financing of Terrorism Program and Suspicious Activity Report
Filing Requirements for Registered Investment Advisers and Exempt
Reporting Advisers; Proposed Rule
Federal Register / Vol. 89 , No. 32 / Thursday, February 15, 2024 /
Proposed Rules
[[Page 12108]]
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Parts 1010 and 1032
RIN 1506-AB58
Financial Crimes Enforcement Network: Anti-Money Laundering/
Countering the Financing of Terrorism Program and Suspicious Activity
Report Filing Requirements for Registered Investment Advisers and
Exempt Reporting Advisers
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: FinCEN, a bureau of the U.S. Department of the Treasury
(Treasury), is issuing this notice of proposed rulemaking (NPRM) to
include certain investment advisers in the definition of ``financial
institution'' under the Bank Secrecy Act (BSA), prescribe minimum
standards for anti-money laundering/countering the financing of
terrorism (AML/CFT) programs to be established by covered investment
advisers, require covered investment advisers to report suspicious
activity to FinCEN pursuant to the BSA, and make several other related
changes to FinCEN regulations. FinCEN is proposing this action to
address gaps in the existing AML/CFT regulatory framework in this
sector. The proposed regulations will apply to investment advisers that
may be at risk for misuse by money launderers, terrorist financers, or
other actors who seek access to the U.S. financial system for illicit
purposes via investment advisers and threaten U.S. national security.
DATES: Written comments on this notice of proposed rulemaking (NPRM)
must be submitted on or before April 15, 2024.
ADDRESSES: Comments may be submitted by any of the following methods:
Federal E-Rulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. Refer to Docket Number
FINCEN-2024-0006 and RIN 1506-AB58.
Mail: Policy Division, Financial Crimes Enforcement
Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-
2024-0006 and RIN 1506-AB58.
Please submit comments by one method only.
FOR FURTHER INFORMATION CONTACT: The FinCEN Resource Center at (800)
767-2825 or email [email protected].
SUPPLEMENTARY INFORMATION:
I. Executive Summary
To address illicit finance risks in the investment adviser
industry, FinCEN is proposing to apply certain AML/CFT requirements to
certain investment advisers. Currently, there are no Federal or State
regulations requiring investment advisers to maintain AML/CFT programs
\1\ or records under the BSA, although some investment advisers may do
so, for example, if they are also licensed as banks (or are bank
subsidiaries), registered as broker-dealers, or advise mutual funds.\2\
This means that thousands of investment advisers overseeing the
investment of tens of trillions of dollars into the U.S. economy
currently operate without legally binding AML/CFT obligations.
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\1\ Section 6101 of the AML Act, codified at 31 U.S.C. 5318(h),
amended the BSA's requirement that financial institutions implement
AML programs to also combat terrorist financing. This NPRM refers to
``AML program'' when discussing the obligation prior to the
enactment of the AML Act, and to ``AML/CFT program'' in reference to
the current obligation contained in the BSA and the proposed rule.
\2\ See infra section IV.E3 and n. 51.
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These proposed regulations aim to close this gap by amending
chapter X of title 31 of the Code of Federal Regulations to add
``investment adviser'' to the definition of ``financial institution''
at 31 CFR 1010.100(t). FinCEN has statutory authority to define
additional types of businesses as financial institutions where it
determines that such businesses engage in any activity ``similar to,
related to, or a substitute for'' those in which any of the businesses
listed in the statutory definition are authorized to engage.\3\ FinCEN
proposes to make such a determination with respect to investment
advisers, which would be defined to include two types of advisers:
those that are (1) registered or required to register with the U.S.
Securities and Exchange Commission (SEC, and, such investment advisers,
RIAs) and (2) investment advisers that report to the SEC as Exempt
Reporting Advisers (ERAs) pursuant to the Investment Advisers Act of
1940, as amended (Advisers Act),\4\ and the rules thereunder.
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\3\ 31 U.S.C. 5312(a)(2)(Y).
\4\ 15 U.S.C. 80b-1 et seq.
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Accordingly, this proposed rule would establish AML/CFT
requirements for RIAs and ERAs. In full, the proposed rule would
require RIAs and ERAs to implement an AML/CFT program, file Suspicious
Activity Reports (SARs) with FinCEN, keep records relating to the
transmittal of funds (Recordkeeping and Travel Rule), and other
obligations of financial institutions under the BSA. The proposed rule
would also apply information-sharing provisions between and among
FinCEN, law enforcement government agencies, and certain financial
institutions, and would subject investment advisers to the ``special
measures'' imposed by FinCEN pursuant to section 311 of the USA PATRIOT
Act.
Concurrent with this proposal, FinCEN is withdrawing the 2015
proposed rule that would have applied AML program, SAR filing, and
other AML/CFT requirements to RIAs.\5\
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\5\ See FinCEN, Anti-Money Laundering Program and Suspicious
Activity Report Filing Requirements for Registered Investment
Advisers, 80 FR 52680 (Sept. 1, 2015).
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In this rulemaking, FinCEN is not proposing to include a customer
identification program (CIP) requirement, nor is it proposing to
include within the AML/CFT program requirements an obligation to
collect beneficial ownership information for legal entity customers at
this time. FinCEN anticipates addressing CIP via a future joint
rulemaking with the SEC and addressing the requirement to collect
beneficial ownership information for legal entity customers in
subsequent rulemakings.
Moreover, because mutual funds are already defined as ``financial
institutions'' under the BSA (31 CFR 1010.100(t)(10)), and because of
the regulatory and practical relationship between mutual funds and
their investment advisers, the proposed regulations would also not
require investment advisers to apply AML/CFT program or SAR reporting
requirements to mutual funds.\6\ The proposed regulations would also
remove the existing requirement that investment advisers file reports
for the receipt of more than $10,000 in cash and negotiable instruments
using the joint FinCEN/Internal Revenue Service Form 8300 (Form
8300).\7\ Investment advisers would instead be required to file a
Currency Transaction Report (CTR) for a transaction involving a
transfer of more than $10,000 in currency by, through, or to the
investment adviser, unless subject to an applicable exemption.
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\6\ As described below, FinCEN does not propose to permit
investment advisers to exempt mutual funds that they advise from the
requirements of 31 CFR part 1010, subparts E and F (31 CFR 1010.520,
540, 600-670) that FinCEN proposes to apply to covered investment
advisers in the proposed rule (e.g., certain information sharing,
special standards, prohibitions, and other requirements).
\7\ 31 CFR 1010.330(a)(1)(i), (e)(1); 26 CFR 1.6050I-1(e).
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Finally, FinCEN is proposing to delegate its examination authority
to the SEC given the SEC's expertise in the regulation of investment
advisers and
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the existing delegation to the SEC of authority to examine brokers and
dealers in securities (broker-dealers) and certain investment
companies.\8\
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\8\ 31 CFR 1010.810(b)(6).
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This NPRM is divided into six main sections including this
executive summary in section I. Section II provides background on the
existing AML/CFT regulatory framework; the illicit finance risks that
this rulemaking will address; the SEC's regulatory framework for
investment advisers; the limited extent to which certain RIAs and ERAs
may already implement AML/CFT measures; and a summary of past proposed
rules to apply AML/CFT obligations with respect to investment advisers.
Section III discusses the scope of the proposed rule. Section IV
includes the section-by-section analysis of the elements of the
proposed rule. Section V lays out questions on which FinCEN seeks
comment, and section VI addresses the severability of the proposed
rule's requirements. Section VII includes the Regulatory Analysis
required by relevant statutes and executive orders.
II. Background
A. Current BSA Framework
Enacted in 1970, the Currency and Foreign Transactions Reporting
Act, generally referred to as the BSA, is designed to combat money
laundering, the financing of terrorism, and other illicit financial
activity, and to safeguard the national security of the United
States.\9\ This includes ``through the establishment by financial
institutions of reasonably designed risk-based programs to combat money
laundering and the financing of terrorism.''\10\ The Treasury Secretary
is authorized to administer the BSA and to require financial
institutions to keep records and file reports that ``are highly useful
in . . . criminal, tax, or regulatory investigations, risk assessments,
or proceedings'' or ``intelligence or counterintelligence activities,
including analysis, to protect against international terrorism.'' \11\
The Secretary delegated the authority to implement, administer, and
enforce the BSA and its implementing regulations to the Director of
FinCEN.\12\
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\9\ See 31 U.S.C. 5311. Certain parts of the Currency and
Foreign Transactions Reporting Act, its amendments, and the other
statutes relating to the subject matter of that Act, have come to be
referred to as the BSA. The BSA is codified at 12 U.S.C. 1829b, 12
U.S.C. 1951-1960, and 31 U.S.C. 5311-5314 and 5316-5336, and
includes notes thereto.
\10\ 31 U.S.C. 5311(3).
\11\ 31 U.S.C. 5311(1).
\12\ Treasury Order 180-01, paragraph 3(a) (Jan. 14, 2020),
available at https://home.treasury.gov/about/general-information/orders-and-directives/treasury-order-180-01.
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Pursuant to this authority, FinCEN may define a business or agency
as a ``financial institution'' if it engages in any activity determined
by regulation ``to be an activity which is similar to, related to, or a
substitute for any activity'' in which a ``financial institution'' as
defined by the BSA is authorized to engage.\13\ Additionally, the BSA
requires financial institutions to maintain programs to combat money
laundering and the financing of terrorism and authorizes the
Secretary--and thereby FinCEN--to issue regulations prescribing
``minimum standards'' for such AML/CFT programs.\14\ Similarly, under
the BSA, FinCEN may require financial institutions to ``report any
suspicious transactions relevant to a possible violation of law or
regulation.'' This provision authorizes FinCEN to require the filing of
SARs.\15\ FinCEN also has authority under the BSA to authorize the
sharing of financial information by financial institutions \16\ in
specified circumstances, and to require financial institutions to keep
records and maintain procedures to ensure compliance with the BSA and
its implementing regulations or to guard against money laundering.\17\
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\13\ 31 U.S.C. 5312(a)(2)(Y).
\14\ 31 U.S.C. 5318(h)(1), (2).
\15\ 31 U.S.C. 5318(g)(1).
\16\ See Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001 (USA PATRIOT Act), Public Law 107-56, sec. 314(a), (b).
\17\ See 12 U.S.C. 1953; 31 U.S.C. 5318(a)(2).
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B. Investment Adviser Industry and Regulation
1. Investment Adviser Industry
The investment adviser industry in the United States consists of a
wide range of business models geared towards providing advisory
services to many different types of customers.\18\ Some of the advisory
services that investment advisers may provide include portfolio
management, financial planning, and pension consulting. Advisory
services can be provided on a ``discretionary'' or ``non-
discretionary'' basis.\19\ Investment advisers provide their expertise
to a wide range of customers, including retail investors, high-net-
worth individuals, private institutions, and governmental entities
(including local, State, and foreign government funds).\20\ Investment
advisers often work closely with their customers to formulate and
implement their customers' investment decisions and strategies.
Investment advisers may be organized in a variety of legal forms,
including corporations, sole proprietorships, partnerships, or limited
liability companies.\21\
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\18\ This proposed rule uses the term ``customers'' for those
natural and legal persons who enter into an advisory relationship
with an investment adviser. This is consistent with the terminology
in the BSA and FinCEN's implementing regulations. FinCEN
acknowledges that the Advisers Act and its implementing regulations
primarily use the term ``clients,'' and so that term is used in
specific reference to Advisers Act requirements; otherwise, the term
``customers'' is used.
\19\ 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, general Instructions at p. 28, available at https://www.sec.gov/about/forms/formadv-instructions.pdf. According to the
Investment Advisers Association (IAA), as of 2021, over 90 percent
of RIAs manage client assets on a discretionary basis. Investment
Adviser Association, Investment Adviser Industry Snapshot 2022, p.
53 (IAA Snapshot), available at https://investmentadviser.org/wp-content/uploads/2022/06/Snapshot2022.pdf.
\20\ See Part 1A, Item 5 of Form ADV for a list of examples of
different types of advisory clients.
\21\ See Part 1A, Item 3.A of Form ADV.
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The Advisers Act and its implementing rules and regulations form
the primary framework governing advisory activity, along with other
Federal securities laws and their implementing rules and regulations,
such as the Investment Company Act of 1940, the Securities Act of 1933,
and the Securities Exchange Act of 1934.\22\ Since the Advisers Act was
amended in 1996 and 2010, generally only investment advisers who have
at least $100 million in assets under management (AUM) or advise a
registered investment company \23\ may register with the SEC.\24\ Other
investment advisers typically register with the State in which the
adviser maintains its principal place of business.
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\22\ See generally 15 U.S.C. 80a-1 et seq. (Investment Company
Act of 1940 (Investment Company Act)); 15 U.S.C. 77a et seq.
(Securities Act of 1933); 15 U.S.C. 78a et seq. (Securities and
Exchange Act of 1934).
\23\ See 15 U.S.C. 80a-3 (defining investment company). If an
investment company meets the definition of an investment company
under 15 U.S.C. 80a-3 and cannot rely on an exception or an
exemption from registration, generally it must register with the SEC
under the Investment Company Act and must register its public
offerings under the Securities Act.
\24\ Investment advisers with more than $100 million assets
under management may register with the SEC, and investment advisers
with more than $110 million in assets under management must register
with the SEC, unless eligible for an exception. See 17 CFR 275.203A-
1.
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SEC-Registered Investment Advisers. Unless eligible to rely on an
exception,
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investment advisers that manage more than $110 million AUM must
register with the SEC, as well as submit a Form ADV and update it at
least annually.\25\ The SEC administers and enforces the Federal
securities laws applicable to RIAs. As of July 31, 2023, there were
15,391 RIAs, reporting approximately $125 trillion in AUM for their
clients.\26\
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\25\ See id.; 17 CFR 275.204-1. Investment advisers register
with the SEC by filing Form ADV and are required to file periodic
updates. Form ADV is available at https://www.sec.gov/files/formadv.pdf. A detailed description of Form ADV's requirements is
available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_formadv.html.
\26\ The number of RIAs and corresponding AUM, and the number of
ERAs, are based on a Treasury review of Form ADV information filed
as of July 31, 2023. This Form ADV data is available at Frequently
Requested FOIA Document: Information About Registered Investment
Advisers and Exempt Reporting Advisers, http://www.sec.gov/foia/docs/invafoia.htm. The $125 trillion in AUM includes approximately
$22 trillion in assets managed by mutual funds, which are advised by
RIAs and are subject to AML/CFT obligations under the BSA and its
implementing regulations.
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Exempt Reporting Advisers. An ERA is an investment adviser that
would be required to register with the SEC but is statutorily exempt
from such requirement \27\ because: (1) it is an adviser solely to one
or more venture capital funds; or (2) it is an adviser solely to one or
more private funds and has less than $150 million AUM \28\ in the
United States.\29\ Private funds are privately offered investment
vehicles that pool capital from one or more investors to invest in
securities and other investments.\30\ Private funds do not register
with the SEC, and advisers to these funds often categorize the fund by
the investment strategy they pursue. These include hedge funds, private
equity funds, and venture capital funds, among others. Even though they
are not required to register, ERAs must still file an abbreviated Form
ADV with the SEC, and the SEC maintains authority to examine ERAs. As
of July 31, 2023, there were 5,846 ERAs that were exempt from
registering with the SEC but had filed an abbreviated Form ADV.\31\
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\27\ An adviser that is eligible to file reports as an ERA may
nonetheless elect to register with the SEC as an RIA so long as it
meets the criteria for registration. An investment adviser that
relies on one of these exemptions must still evaluate the need for
State registration.
\28\ Form ADV uses the term ``regulatory assets under
management'' (RAUM) instead of ``assets under management.'' Form ADV
describes how advisers must calculate RAUM and states that in
determining the amount of RAUM, an adviser should ``include the
securities portfolios for which [it] provide[s] continuous and
regular supervisory or management services as of the date of
filing'' the form. See Form ADV, Instructions for Part 1A,
Instruction 5.b.
\29\ See sections 203(l) and 203(m) of the Advisers Act and 17
CFR 275.203(m)-1, respectively. ERAs are exempt from registration
with the SEC, but are required to file reports on Form ADV with the
SEC and are subject to certain rules under the Advisers Act.
\30\ Section 202(a)(29) of the Advisers Act defines the term
``private fund'' as an issuer that would be an investment company,
as defined in section 3 of the Investment Company Act (15 U.S.C.
80a-3), but for section 3(c)(1) or 3(c)(7) of that Act. Section
3(c)(1) excludes from the definition of investment company a
privately-offered issuer having fewer than a certain number of
beneficial owners. Section 3(c)(7) excludes from the definition of
investment company a privately-offered issuer the securities of
which are owned exclusively by ``qualified purchasers'' (generally,
persons and entities owning a specific amount of investments).
\31\ The number of ERAs is derived from a Treasury review of
Form ADV information filed as of July 31, 2023. See supra n. 26.
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Private Fund Advisers. Private fund advisers, a type of
ERA, are exempt from registering with the SEC if they exclusively
advise private funds and have less than $150 million AUM in the United
States. As of July 31, 2023, there were approximately 4,400 exempt
private fund advisers, approximately 500 of which were also venture
capital advisers.\32\
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\32\ Based on a Treasury review of Form ADV information filed as
of July 31, 2023. See supra n. 26.
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Venture Capital Advisers. Venture capital advisers,
another type of ERA, are exempt from registering with the SEC if they
provide services only to venture capital funds,\33\ regardless of the
amount of AUM.\34\ As of July 31, 2023, there were approximately 2,000
exempt venture capital advisers, approximately 500 of which were also
private fund advisers.\35\
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\33\ See 17 CFR 275.203(l)-1 (defining ``venture capital
fund'').
\34\ Certain venture capital advisers may be registered with the
SEC if they no longer satisfy the criteria to be ERAs (e.g., they no
longer pursue a venture capital strategy (by seeking to hold
securities in companies past the initial public offering stage or
pursuing hedge-fund like investment strategies)) or otherwise opt to
register with the SEC.
\35\ Based on a Treasury review of Form ADV information filed as
of July 31, 2023. See supra n. 26.
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State-Registered Investment Advisers. State-registered investment
advisers generally have less than $100 million in AUM. State-registered
investment advisers are generally prohibited from registering with the
SEC and instead register with and are supervised by the relevant State
authority, unless they meet certain exceptions or their State does not
supervise these entities.\36\ State-registered investment advisers also
file a Form ADV, which they submit to the relevant State regulator. As
of December 31, 2022, there were 17,063 State-registered investment
advisers who have approximately $420 billion in AUM.\37\
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\36\ See 17 CFR 275.203A-2. Other exceptions to the prohibition
on SEC registration include: (1) an adviser that would be required
to register with 15 or more States (the multi-State exemption); (2)
an adviser advising a registered investment company; (3) an adviser
affiliated with an RIA; and (4) a pension consultant. Persons
satisfying these criteria and the definition of ``investment
adviser'' may register as such with the SEC. Investment advisers
with a principal office and place of business in New York and over
$25 million AUM are required to register with the SEC.
\37\ See North American Security Administrators Association,
NASAA Investment Adviser Section 2023 Annual Report, p.3, https://www.nasaa.org/wp-content/uploads/2023/09/2023-IA-Section-Report-FINAL.pdf.
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Non-U.S. Investment Advisers. Non-U.S. advisers whose principal
offices and places of business are outside the United States, but
solicit or advise ``U.S. persons,'' are subject to the Advisers Act and
must register with the SEC unless eligible for an exception. One of
those exceptions is the ``foreign private adviser'' exemption, and an
adviser relying on this exemption is not required to make any filing
with the SEC.\38\ For those non-U.S. advisers registered with the SEC,
the Commission states that it does not intend to seek to apply the
substantive provisions of the Advisers Act to a non-U.S. adviser that
is registered with the SEC with respect to its non-U.S. clients.\39\
Non-U.S. advisers may also report to the SEC as ERAs if they meet the
requirements to report as ERAs.
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\38\ The ``foreign private adviser'' exemption is available to
an adviser that (i) has no place of business in the United States;
(ii) has, in total, fewer than 15 clients in the United States and
investors in the United States in private funds advised by the
adviser; (iii) has aggregate assets under management attributable to
these clients and investors of less than $25 million; and (iv) does
not hold itself out generally to the public in the United States as
an investment adviser. See 15 U.S.C. 80b-2(a)(30), 80b-3(b)(3).
\39\ See SEC, Exemptions for Advisers to Venture Capital Funds,
Private Fund Advisers With Less Than $150 Million in Assets Under
Management, and Foreign Private Advisers, Final Rule, Investment
Advisers Act Release No. 3222 (Jun. 22, 2011), 76 FR 39645, 39667
(Jul. 6, 2011).
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2. Existing Regulatory Framework for Investment Advisers
Oversight of the investment adviser industry by Federal and State
securities regulators generally is focused on protecting investors and
the overall securities market from fraud and manipulation. Most
investment advisers are subject to certain reporting requirements and
the extent of those requirements depends on whether the investment
adviser is an RIA, registered at the State level, exempt from
registration as an ERA, or otherwise not required to register with a
Federal or State securities regulator.\40\ RIAs are subject to various
SEC rules and
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regulations governing, among other things, their marketing and
disclosures to clients, best execution for client transactions, and
disclosures of conflicts of interest and disciplinary information.
State-registered investment advisers may have similar requirements
under State securities laws and regulations.\41\ Investment advisers,
depending on their registration status, are also generally subject to
examination by the SEC or State securities regulators. In some
circumstances, Federal securities, tax, or other rules and regulations
may impose on investment advisers information collection or disclosure
obligations similar to some AML/CFT measures.
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\40\ For instance, an investment adviser may be exempt from both
Federal and State registration requirements if they had less than
$25 million AUM and fewer than six clients in a State. These
advisers are not required to register, nor are they ERAs.
\41\ See, e.g., Cal. Corp. Code, Ch.3, 25230-25238.
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However, these requirements are not designed to address money
laundering, terrorist financing, and other illicit financial activity
risks associated with investment advisers. Further, although some
investment advisers implement AML/CFT requirements in certain
circumstances or for certain customers, as described below in section
II.C, application of AML/CFT measures is not uniform across the
industry, and investment advisers' implementation of such measures is
not subject to comprehensive enforcement or examination. Providers of
the same financial services may be subject to different AML/CFT
obligations (if any), and an investor or customer seeking to obscure
the origin of its funds or identity can choose an investment adviser
that does not apply AML/CFT measures to its customers and
activities.\42\
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\42\ For instance, FinCEN research identified two investment
advisers with a focus on Russian customers that advertised
investment structures that would allow customers to avoid going
through ``know your customer'' procedures.
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Generally, RIAs, State-registered investment advisers, and ERAs are
required to file (and annually update) Form ADV with the SEC, the
relevant State securities regulator, or both.\43\ Form ADV collects
certain information about the adviser, including (depending on the
adviser's registration status) its AUM, ownership, number of clients,
number of employees, business practices, custodians of client funds,
and affiliations, as well as certain disciplinary or material events of
the adviser or its employees. ERAs who are not registered with the SEC
or a State securities regulator are only required to file an
abbreviated version of Form ADV--they are required to answer fewer
client-related questions and provide less information about the
services they provide. Form ADV does not require investment advisers to
disclose the names of individual clients or investors.\44\
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\43\ See 17 CFR 275.203-1 and 204-4.
\44\ Advisers to private funds are, however, required to name
their private fund clients on section 7.B.(2) of Schedule D of Form
ADV Part 1A. In some cases, those names may be coded.
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Some RIAs are also required to file a Form PF, which collects
information on private funds advised by the RIA.\45\ Information
collected on Form PF includes the approximate percentage of a fund's
equity that is beneficially owned by different types of investors,
including U.S. and non-U.S. investors. Some private fund advisers,
including ERAs, that are required to report on Form ADV are not
required to file Form PF.\46\ Unlike Form ADV, Form PF is non-public.
It is provided to both the SEC and the Financial Stability Oversight
Council (FSOC) and is intended to enhance investor protection and
provide the FSOC with data for use in assessing systemic risk.
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\45\ See 15 U.S.C. 80b-4(b). A Form PF must be submitted by any
RIA that manages one or more private funds and collectively (with
its related persons) had at least $150 million in private fund AUM
as of the last day of its most recently completed fiscal year. See
17 CFR 275.204(b)-1. ``Related person'' is defined in Form PF, which
is available at https://www.sec.gov/files/formpf.pdf.
\46\ See 17 CFR 275.204(b)-1.
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C. Illicit Finance Risk Associated With Investment Advisers
As detailed below, Treasury assesses that RIAs and ERAs pose a
material risk of misuse for illicit finance. Including investment
advisers as ``financial institutions'' under the BSA and applying
comprehensive AML/CFT measures to these investment advisers are likely
to reduce this risk.
1. Illicit Finance Vulnerabilities
RIAs and ERAs are vulnerable to misuse or exploitation by criminals
or other illicit actors for several reasons. First, the lack of
comprehensive AML/CFT regulations directly and categorically applicable
to investment advisers means they, as a whole, are not required to
understand their customers' ultimate sources of wealth or identify and
report potentially illicit activity to law enforcement. The current
patchwork of implementation by some RIAs and ERAs may also create
arbitrage opportunities for illicit actors by allowing them to find
RIAs and ERAs with weaker or non-existent customer diligence procedures
when these actors seek to access the U.S. financial system. Second,
where AML/CFT obligations apply to investment adviser activities, the
obliged entities (such as custodian banks, broker-dealers, and fund
administrators providing services to investment advisers and the
private funds that they advise) do not necessarily have a direct
relationship with the customer or, in the private fund context,
underlying investor in the private fund. Further, these entities may be
unable to collect relevant investor information from the RIA or ERA to
comply with the entities' existing obligations \47\ (either because the
adviser is unwilling to provide, or has not collected, such
information). Third, the existing Federal securities laws are not
designed to comprehensively detect illicit proceeds or other illicit
activity that is ``integrating'' into the U.S. financial system \48\
through an RIA or ERA. Fourth, RIAs and ERAs routinely rely on third
parties for administrative and compliance activities, and these
entities are subject to varying levels of AML/CFT regulation. Fifth,
particularly for private funds, it is routine for investors to invest
through layers of legal entities that may be registered or organized
outside of the United States, making it challenging to collect
information relevant to understand illicit finance risk under existing
frameworks.
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\47\ See, e.g., FinCEN and Federal Functional Regulators
(including SEC,), Joint Release, ``Guidance on Obtaining and
Retaining Beneficial Ownership Information'' (Mar. 5, 2010) (noting
that customer due diligence procedures for legal entity customers
may include ``obtaining information about the structure or ownership
of the entity so as to allow the [financial] institution to
determine whether the account poses heightened risk.'')
\48\ Generally, money laundering involves three stages, known as
placement, layering, and integration. At the ``placement'' stage,
proceeds from illegal activity or funds intended to promote illegal
activity are first introduced into the financial system. 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. ``Integration'' occurs
when illegal proceeds previously placed into the financial system
are made to appear to have been derived from a legitimate source.
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(a) Lack of Comprehensive and Uniform AML/CFT Obligations
``Investment advisers'' is not presently included in the definition
of ``financial institution'' under the BSA or its implementing
regulations.\49\ This means that, although they have Form 8300
obligations to report cash transactions above $10,000, investment
advisers are typically not subject to most of the AML/CFT program,
recordkeeping, or reporting obligations that apply to banks, broker-
dealers, and certain other financial institutions.\50\ For example,
investment advisers are not required to maintain an AML/CFT program
[[Page 12112]]
(consisting of internal controls, an AML/CFT officer, independent
testing, and employee training), and do not have independent SAR
filing, customer due diligence (CDD), or CIP obligations. These are key
elements of AML/CFT compliance through which an investment adviser
would identify and report to law enforcement and regulators a customer,
investor, or transaction that may be associated with illicit finance
activity.
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\49\ See 31 CFR 1010.100(t).
\50\ Investment advisers are, like any other ``person,'' subject
to an obligation to file Form 8300. 31 CFR 1010.330(a)(1)(i),
(e)(1); 26 CFR 1.6050I-1(e).
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As noted above, some RIAs and ERAs may perform certain AML/CFT
functions if the entity is also a registered broker-dealer or is a bank
(i.e., a dual registrant), or is an operating subsidiary of a bank;\51\
other investment advisers are affiliates of banks or broker-dealers,
which may implement an enterprise-wide AML/CFT program that would
include that investment adviser. A Treasury analysis of Form ADV data
found that approximately three percent of RIAs were dually registered
as a broker-dealer or licensed as a bank, and that these entities held
about 10 percent of the AUM held by all RIAs. The same analysis found
that approximately 20 percent of RIAs, representing approximately 75
percent of the total AUM of RIAs, were affiliated with either a bank or
broker-dealer.
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\51\ Investment advisers that are banks (or bank subsidiaries)
subject to the jurisdiction of the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, and the National Credit Union
Administration (collectively, the FBAs) are accordingly also subject
to applicable FBA regulations imposing AML/CFT requirements on
banks. See, e.g., 12 CFR 5.34(e)(3) and 5.38(e)(3) (OCC requirements
governing operating subsidiaries of national banks and Federal
savings associations).
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In other circumstances, an investment adviser may perform AML/CFT
functions via contract with a broker-dealer (e.g., CIP for joint
customers) or other financial institution, such as when the adviser
advises an open-end registered investment company (e.g., mutual fund).
For instance, some RIAs have already implemented voluntary AML/CFT
programs pursuant to the Securities Industry and Financial Markets
Association (SIFMA) No-Action Letter under which the staff of the SEC's
Division of Trading and Markets stated that it would not recommend
enforcement action if a broker-dealer relies on RIAs to perform some or
all aspects of the broker-dealer's CIP obligations or the portion of
CDD requirements regarding beneficial ownership requirements for legal
entity customers, provided that certain conditions are met, including
that the RIA implements its own AML/CFT program.\52\ Mutual funds,\53\
which are advised by approximately 10 percent of RIAs \54\ and hold
approximately $22.1 trillion in assets,\55\ are also subject to AML/CFT
obligations under the BSA and its implementing regulations.\56\
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\52\ See SEC, Letter to Mr. Bernard V. Canepa, Associate General
Counsel, Securities Industry and Financial Markets Association
(SIFMA), Request for No-Action Relief Under Broker-Dealer Customer
Identification Program Rule (31 CFR 1023.220) and Beneficial
Ownership Requirements for Legal Entity Customers (31 CFR 1010.230)
(Dec. 9, 2022), https://www.sec.gov/files/nal-sifma-120922.pdf
(SIFMA No-Action Letter). This request for No-Action Relief was
originally issued in 2004 and has been periodically reissued and
remains effective. Any SEC staff statements cited represent the
views of the SEC staff. They are not a rule, regulation, or
statement of the SEC. Furthermore, the SEC has neither approved nor
disapproved their content. These SEC staff statements, like all SEC
staff statements, have no legal force or effect: they do not alter
or amend applicable law; and they create no new or additional
obligations for any person.
\53\ As used in this NPRM, ``mutual fund'' has the same
definition as in FinCEN's regulations, and refers to an ``investment
company'' (as the term is defined in section 3 of the Investment
Company Act (15 U.S.C. 80a-3)) that is an ``open-end company'' (as
that term is defined in section 5 of the Investment Company Act (15
U.S.C. 80a-5)) that is registered or is required to register with
the SEC under section 8 of the Investment Company Act (15 U.S.C.
80a-8). See 31 CFR 1010.100(gg). Exchange-traded funds (ETFs) are a
type of exchange-traded investment product that must register with
the SEC under the Investment Company Act and are generally organized
as either an open-end company (``open-end fund'') or unit investment
trust. The SEC's ETF Rule (rule 6c-11 under the Investment Company
Act), issued in 2019, clarified ETFs are issuing ``redeemable
securit[ies]'' and are generally ``regulated as open-end funds
within the meaning of section 5(a)(1) of the [Investment Company]
Act.'' FinCEN's definition of a mutual fund under 1010.100(gg)
applies to an ETF that is registered as an ``open-end company'' (as
the term is defined in section 5 of the Investment Company Act).''
\54\ Information derived from a Treasury review of Form ADV
information. See supra n. 26.
\55\ According to the Investment Company Institute 2023
Investment Company Factbook, as of December 31, 2022, U.S. mutual
funds held approximately $22.1 trillion in AUM, while ETFs held
approximately $6.4 trillion in AUM. Investment Company Institute,
2023 Investment Company Factbook, p.2, https://www.ici.org/system/files/2023-05/2023-factbook.pdf.
\56\ See 31 CFR 1010.100(gg); 31 CFR part 1024.
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Outside of these circumstances, some investment advisers have
voluntarily implemented certain AML/CFT measures, such as CDD or other
CIP requirements. However, because these programs are not required by
any regulations under the BSA, advisers have wide discretion in what
information to request from their customers and private fund investors.
Additionally, RIAs and ERAs are not examined for compliance with
voluntary AML/CFT measures not required by law, so the adviser may not
be made aware of deficiencies or gaps in their programs via
examination, and thereafter make improvements, and there are more
limited enforcement mechanisms to pursue against the adviser for
failing to implement such measures.
While the programs discussed above provide some AML/CFT coverage
for parts of the investment adviser industry, they mean that RIAs and
ERAs providing the same financial services have differing AML/CFT
obligations. For example, depending on corporate policies and practice,
stand-alone RIAs or ERAs are likely subject to different AML/CFT
compliance approaches than RIAs or ERAs that are part of a bank or
financial holding company; and an investor or customer seeking to
obscure the origin of its funds or its identity can choose an RIA or
ERA that has limited or no AML/CFT obligations.
The fact that investment advisers are not currently BSA-defined
financial institutions also limits the ability of investment advisers
to provide highly useful information to law enforcement, regulators,
and other relevant authorities. For instance, unless they are BSA-
defined financial institutions, RIAs and ERAs would not be afforded the
protection from liability (safe harbor) that applies to financial
institutions when filing SARs.\57\ Even though investment advisers are
able to file voluntary SARs, they could face increased legal risk from
customers or other counterparties without the safe harbor. RIAs and
ERAs are also currently unable to receive and respond to law
enforcement requests for information under section 314(a) of the USA
PATRIOT Act as they are not BSA-defined financial institutions.\58\
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\57\ 31 U.S.C. 5318(g)(3)(A).
\58\ See 31 CFR 1010.520.
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Additionally, investment advisers, or associations of investment
advisers, that are not BSA-defined financial institutions cannot
voluntarily share information under section 314(b) of the USA PATRIOT
Act. Moreover, at present, existing BSA-defined financial institutions
are limited in their ability to share with RIAs and ERAs, or receive
from investment advisers, information potentially related to money
laundering or terrorist financing that are not themselves BSA financial
institutions.\59\ Becoming a BSA-defined financial institution would
allow RIAs and ERAs to share information potentially related to money
laundering or terrorist financing with, and receive requests from,
other financial institutions that already utilize section 314(b), such
as broker-dealers. This could help financial institutions gain
additional insight into their customers' transactions with RIAs and
ERAs and,
[[Page 12113]]
potentially, a more accurate and holistic understanding of their
customers' activities.
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\59\ See 31 CFR 1010.540.
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(b) Existing AML/CFT Obligations Often Apply to Intermediaries, But Not
the Customer-Facing Entity
Investment advisers engage in trading or transactional activities
on behalf of their customers through relationships with financial
institutions that are subject to AML/CFT obligations, such as broker-
dealers and banks, among others. For instance, Rule 206(4)-2 (the
Custody Rule) under the Advisers Act requires RIAs that have custody of
client funds or securities generally to maintain those funds and
securities with a qualified custodian, defined primarily to encompass
BSA-defined financial institutions.\60\
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\60\ 17 CFR 275.206(4)-2. 17 CFR 275.206(4)-2. The SEC recently
proposed amendments to the Custody Rule. See SEC, Safeguarding
Advisory Client Assets, Investment Advisers Act Release No. 6240
(Feb. 15, 2023), 88 FR 14672 (Mar. 9, 2023).
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While investment advisers often do not take possession of financial
assets, they nonetheless may have the most direct relationship with the
customers they advise and thus be best positioned to obtain the
necessary documentation and information from and about the customers
concerning their assets that the investment adviser is deploying in
public or private financial markets.\61\ If some of these assets
include the proceeds of illegal activities, or are intended to further
such activities, an investment adviser's AML/CFT program could help
discover such issues and prevent the customer from further using the
U.S. financial system, while reporting such information for law
enforcement purposes. For example, in some cases, an investment adviser
may be the only person or entity with a complete understanding of the
source of a customer's invested assets, background information
regarding the customer, or the objectives for which the assets are
invested.
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\61\ See SIFMA No-Action Letter supra n.52 (incoming letter to
SEC stating ``RIAs often have the most direct relationship with the
customers they introduce to broker-dealers and are best able to
obtain the necessary documentation and information from and about
the customers'').
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Other market participants may, for example, hold and trade assets
in an account controlled by an adviser, but these parties, as
intermediaries, often rely solely on the investment adviser's
instructions and lack independent knowledge of the adviser's customers.
Further, an investment adviser may use multiple broker-dealers or banks
for trading and custody services, making it difficult for one financial
institution in the chain to have a complete picture of an investment
adviser's activity or to detect suspicious activity involving the
investment adviser. Without complete information, such an institution
may not have sufficient information to file a SAR, or it may be
required to file a SAR that only has partial information concerning the
investment adviser's transactions on behalf of a particular customer.
This limits the ability of law enforcement to identify illicit activity
that may be occurring through investment advisers.
(c) Non-AML/CFT Regulations Do Not Fully Address Illicit Finance Risks
RIAs are subject to various SEC rules and regulations governing,
among other things, their marketing and disclosures to clients, best
execution for client transactions, and disclosures of conflicts of
interest and disciplinary information. In some circumstances, Federal
securities, tax, or other rules and regulations may impose obligations
similar to some AML/CFT measures by requiring the collection or
disclosure of certain information by RIAs and ERAs. However, these
regulatory requirements are not designed to explicitly address the risk
that an RIA or ERA may be used to move proceeds or funds tied to money
laundering, terrorist financing, or other illicit activity; they are
instead designed to protect customers against fraud, misappropriation,
or other illegal conduct by an investment adviser. Accordingly, even if
they require an RIA or ERA to report certain kinds of illegal conduct
or collect relevant information, they do not provide a comprehensive
framework that incorporates the AML/CFT and national security purposes
of the BSA, an understanding of relevant illicit finance risks and
activity, and a process to assess and report suspicious activity to law
enforcement and other appropriate authorities.
For example, the SEC's Custody Rule \62\ generally requires RIAs
with custody of client funds and securities to maintain client assets
at a qualified custodian and comply with other safeguards, subject to
certain limited exceptions. This rule is intended to protect advisory
client assets from loss, misuse, theft, or misappropriation by, and the
insolvency or financial reverses of, the adviser. Qualified custodians
may be able to detect and report certain suspicious activity involving
a RIA's customer, such as a high volume of trading or indications of
layering activity, but they often may lack identifying information
about the RIA's customer and their source of funds because that
customer is not their institution's customer. As a result, qualified
custodians can be limited in their ability to detect other types of
illicit proceeds associated with that RIA's customer.
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\62\ See 17 CFR 275.206(4)-2.
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Other financial intermediaries providing services to an investment
adviser or its customers, such as banks, clearing brokers, executing
brokers, and futures commission merchants, may have AML/CFT
obligations, but often, they may not be well-positioned to have a
complete understanding of the identity, source of funds, and investment
objectives of the adviser's underlying customer. For instance, some
investment advisers may be reluctant to have a broker-dealer contact
their customers because they view the broker-dealer as a
competitor.\63\
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\63\ See SIFMA No-Action Letter, supra n.520.
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Similarly, the Compliance Rule \64\ under the Advisers Act does not
require an RIA to implement AML/CFT-related policies and procedures.
Under the Compliance Rule, an RIA must adopt and implement written
policies and procedures reasonably designed to prevent violations of
the Advisers Act and its implementing rules and regulations and to
designate a chief compliance officer to administer the RIA's compliance
policies and procedures. These policies and procedures should take into
consideration the nature of that firm's operations and should be
designed to prevent, detect, and promptly correct any violations of the
Advisers Act or the rules thereunder. The Compliance Rule does not
address the requirements of the BSA. While the Compliance Rule
establishes a procedural and organizational framework that RIAs may be
able to build upon to implement AML/CFT measures, the rule does not
mandate that an RIA address AML/CFT in its policies and procedures.
Some investment advisers may have policies and procedures to comply
with Office of Foreign Assets Control (OFAC) sanctions, which similarly
may provide a framework for implementing certain AML/CFT measures
included in the proposed rule.\65\
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\64\ See 17 CFR 275.206(4)-7.
\65\ While OFAC sanctions requirements are separate from AML/CFT
requirements, investment advisers, like other U.S. persons, must
comply with OFAC sanctions. AML/CFT requirements and OFAC sanctions
also share a common national security goal, apply a risk-based
approach, and rely on similar recordkeeping and reporting
requirements to ensure compliance. For this reason, many financial
institutions view compliance with OFAC sanctions as related to AML/
CFT compliance obligations, and may include sanctions compliance and
AML/CFT compliance in a single enterprise-wide compliance program.
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[[Page 12114]]
(d) Investment Advisers to Private Funds Routinely Rely on Third-Party
Administrators Located Outside of the United States
Routine reliance on third-party administrators by investment
advisers to private funds for a range of administrative tasks,
including investor due diligence and identity verification, poses a
material illicit finance risk. While some third-party administrators
are located in the United States and may be affiliated with larger
financial institutions, others are located in offshore financial
centers where private funds are routinely domiciled, usually for tax or
other commercial reasons unrelated to AML/CFT regulation, such as the
Cayman Islands.\66\ The due diligence and verification practices of
these offshore fund administrators are not uniform, and may vary based
upon the requirements of the local regulatory regime as well as the
requirements of the fund's adviser. While some investment advisers may
rely on these administrators to manage their perceived risk or to
comply with local regulatory requirements, the piecemeal review of
investor information is not a substitute for comprehensive AML/CFT
compliance measures. These third-party administrators may also face
legal and regulatory challenges in receiving and verifying
documentation from foreign legal entity investors in funds they
service. Further, effective AML/CFT supervision of fund administrators
based outside the United States is often still nascent, with foreign
regulators taking few enforcement actions to date.\67\
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\66\ See Caribbean Financial Action Task Force Mutual Evaluation
of the Cayman Islands (Mar. 2019), p. 26, 30-31, https://www.fatf-gafi.org/media/fatf/documents/reports/mer-fsrb/CFATF-Cayman-Islands-Mutual-Evaluation.pdf. While a fund may be domiciled or registered
in the Cayman Islands, the adviser managing that fund may be located
in the United States and/or registered with the SEC.
\67\ Id. at pp. 135-140 (Cayman Islands received the lowest
possible rating for supervision). Additionally, fund administrators
in the Cayman Islands filed only 37 SARs in 2017. Id. at p. 117.
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(e) Use of Multiple Legal Entities for Cross-Border Investment
Structure
Some investment advisers provide advisory services to customers
that structure their investments through several layers of U.S. and
foreign legal entities or arrangements, such as limited liability
companies (LLCs) and trusts, often referred to colloquially as ``shell
companies.'' Such structures may be used for legitimate tax reasons,
but can be used to obfuscate the source of funds for either natural
person or legal entity investors and obscure unlawful conduct.
An additional challenge is the use of nominee arrangements, in
which an intermediary (often a foreign bank or overseas custodial
service provider) agrees to be identified as the nominal investor and
essentially acts as a ``shield'' for individuals who want to make
investments without disclosing their identities or source of funds.
These nominee arrangements can be used in connection with other
intermediaries in the ownership chain (e.g., the nominee may be acting
on behalf of a foreign asset manager, who in turn has the relationship
with an illicit actor or politically exposed person (PEP)). While these
nominee arrangements often can have legitimate purposes, if they are
not explicitly identified in required reports or records, they can be
abused to obscure potentially illicit funds and make it extremely
difficult (if not impossible) for regulators to identify and fully
understand the nature and extent of illicit finance risks in this
sector. As of Q4 2022, private fund advisers reporting on Form PF noted
that they did not know, and could not reasonably obtain information
about, the non-U.S. beneficial ownership of approximately $284 billion
in private fund AUM.\68\
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\68\ See SEC, Private Fund Statistics, Fourth Calendar Quarter
2022, https://www.sec.gov/files/investment/private-funds-statistics-2022-q4.pdf.
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In addition, data privacy or other laws or regulations in effect in
offshore jurisdictions, or contractual obligations, may impact how
certain customer information is shared with investment advisers,
broker-dealers, and other financial institutions (and by extension,
U.S. law enforcement and regulators). While some investment advisers
are introduced to new foreign investors by foreign entities subject to
AML/CFT obligations (such as a broker-dealer), this practice is not
consistent, as other introducers or promoters may be individuals with
no AML/CFT obligations.
2. Illicit Finance Threats to Investment Advisers
Treasury, in coordination with Federal law enforcement and
consultation with the SEC, conducted a comprehensive assessment of
illicit finance risk in the investment adviser industry. Treasury's
review included an analysis of SARs filed between 2013 and 2021 that
were associated with RIAs and ERAs.\69\ That analysis found that 15.4
percent of RIAs and ERAs were associated with or referenced in at least
one SAR (i.e., they were identified either as a subject or in the
narrative section of the SAR) during this time. Further, the number of
SAR filings associated with an RIA or ERA increased by approximately
400 percent between 2013 and 2021--a disproportionately higher increase
than the overall increase in SAR filings, which was approximately 140
percent.\70\
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\69\ Information derived from an analysis of select BSA
reporting.
\70\ From a FinCEN review of the total number of SARs filed
between 2013 and 2021.
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This SAR analysis, along with a review of law enforcement cases and
other information available to the U.S. government, identified several
illicit finance threats involving RIAs and ERAs. First, in some
instances, the investment adviser industry has served as an entry point
into the U.S. market for illicit proceeds associated with foreign
corruption, fraud, and tax evasion. Second, certain advisers manage
billions of dollars ultimately controlled by Russian oligarchs and
their associates who help facilitate Russia's illegal and unprovoked
war of aggression against Ukraine. Third, certain RIAs and ERAs and the
private funds they advise are also being used by foreign states, most
notably the People's Republic of China (PRC) and Russia, to access
certain technology and services with long-term national security
implications through investments in early-stage companies.
(a) Laundering of Illicit Proceeds Through Investment Advisers and
Private Funds
Private funds can be a particularly attractive entry point for
illicit proceeds because they present a possibility of high returns, in
contrast to other, more costly forms of money laundering, such as
trade-based money laundering or informal value transfer systems. Like
other types of pooled accounts or legal entities, they can be used to
obscure the names of individual investors or beneficial owners so that
the investment fund is identified as the owner of a particular asset.
However, there are a wide variety of private funds, and some have
characteristics that have traditionally been seen as less attractive to
money launderers. For instance, some hedge funds may have lock-up
periods of more than a year while venture capital funds and private
equity funds may not permit any withdrawals due to the time it takes
for the private companies in which those funds invest to go public or
otherwise provide an exit strategy for these funds. While these
restrictions may deter criminals who need immediate access to illicit
[[Page 12115]]
proceeds, they are unlikely to deter wealthy corrupt foreign actors who
seek stable returns, and have a medium- to long-term investment
horizon, and do not need immediate access to capital.
The mechanisms for laundering illicit proceeds through investment
advisers and private funds vary, but generally consist of obscuring the
illicit origins of funds and pooling them with legitimate funds to
invest in U.S. securities, real estate, or other assets.
In one significant case involving funds stolen from the Malaysian
government, an RIA was used to launder illicit proceeds into the U.S.
financial system. In December 2012, investment funds affiliated with
Low Taek Jho (Low) laundered approximately $150 million diverted from
1Malaysia Development Berhad's (1MDB) 2012 bond issuance into the U.S.
financial system. Low was CEO of Jynwel Capital Limited, an investment
adviser to a private equity fund in Asia.\71\ Through a subsidiary of
Jynwel Capital Limited, Low purchased equity interests in a vehicle
managed by the Electrum Group, a private equity firm in the United
States ``whose offices are located in New York and Colorado, invests in
public and private companies involved in the exploration and
development of natural resources, precious metals, base metals, and oil
and gas.'' \72\ Electrum Group, LLC is registered with the SEC as an
RIA. To conceal their origin, the funds were moved through multiple
accounts owned by different entities on or about the same day in an
unnecessarily complex manner with no apparent business purpose. This
illustrates the general problem: without an obligation to determine the
source of wealth and purpose for a customer, an investment adviser may
unwittingly permit illicit funds to enter the U.S. financial
system.\73\
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\71\ Low represented to counterparties and potential business
partners that Jynwel Capital Limited was an investment adviser to a
private equity fund.
\72\ Verified Compl. for Forfeiture (Dkt. 3) ] 760, United
States v. Real Property Located in London, United Kingdom Titled in
the Name of Red Mountain Global Ltd., No. 19-cv-1326, (C.D. Cal.
Feb. 22, 2019), https://www.justice.gov/opa/press-release/file/1134376/download.
\73\ See id. ] 204-12.
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In some instances, the investment adviser or other financial
professional may form a private fund through which illicit proceeds can
be transferred as part of a money laundering scheme. While past
examples have featured investment advisers complicit in illegal
activity, an investment adviser may be unwittingly complicit in this
type of activity if they are not required to understand the origin of
funds or nature of their owner. A customer wishing to launder money
could ask an investment adviser to establish a private fund to certain
specifications without informing the adviser of the customer's broader
scheme. Without an obligation to report potential money laundering or
other illicit finance activity, the adviser could participate without
inquiring further.
In July 2018, U.S. law enforcement arrested two alleged
participants, Matthias Krull and Gustavo Adolfo Hernandez Frieri
(Hernandez), in a billion-dollar international scheme to launder funds
obtained through embezzlement, fraud, and bribery from Venezuelan
state-owned oil company Petroleos De Venezuela S.A. (PDVSA).\74\
According to the stipulated factual proffer filed in connection with
his plea agreement, Hernandez conspired to launder approximately $12
million in PDVSA bribe proceeds by creating a private fund, domiciled
in the Cayman Islands, and with a U.S. bank as custodian.\75\
Specifically, he admitted that he conspired to launder $7 million in
bribe payments related to a loan scheme, and $5 million in bribe
payments related to a separate currency exchange scheme, through his
investment advisory firm located in the United States. Separately, a
co-conspirator in the scheme set up fraudulent bond schemes in which
fake bonds would be issued, money transferred into the private fund,
and then the bonds would ``default.'' \76\ While in this instance the
adviser was complicit in the fraudulent scheme, a client could also
direct an unwitting investment adviser to create a private fund to
specifications that facilitate money laundering. In the absence of an
AML/CFT program requirement for investment advisers, the investment
adviser might not have any obligation to evaluate such risks.
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\74\ Department of Justice, ``Former Swiss Bank Executive Pleads
Guilty to Role in Billion-Dollar International Money Laundering
Scheme Involving Funds Embezzled from Venezuelan State-Owned Oil
Company,'' (Aug. 22, 2018), https://www.justice.gov/opa/pr/former-swiss-bank-executive-pleads-guilty-role-billion-dollar-international-money-laundering; Department of Justice, ``Two Members
of Billion-Dollar Venezuelan Money Laundering Scheme Arrested''
(Jul. 25, 2018), https://www.justice.gov/opa/pr/two-members-billion-dollar-venezuelan-money-laundering-scheme-arrested. In August 2018,
Krull pleaded guilty to one count of conspiracy to commit money
laundering, and in November 2019, Hernandez, a former investment
adviser, also pleaded guilty to conspiracy to commit money
laundering in connection with his role in the scheme. Plea Agreement
(Dkt. 163), United States v. Hernandez, (S.D. Fl. Nov. 26, 2019),
https://www.justice.gov/criminal-fraud/file/1316826/download.
\75\ Factual Proffer (Dkt. 164), United States v. Hernandez, No.
18-cr-20685 (S.D. Fl. Nov. 26, 2019), https://www.justice.gov/criminal-fraud/file/1316831/download.
\76\ Criminal Compl., United States v. Guruceaga ( ), 18-mj-3119
(S.D. Fl. Jul. 24, 2018), https://www.justice.gov/criminal-fraud/file/1119981/download.
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(b) Russian Political and Economic Elites' Access to U.S. Investments
Investment advisers and private funds they advise have served as an
important entry point into the U.S. financial system for wealthy
Russians seeking to obscure their ownership of U.S. assets.\77\
Although many of these Russian individuals were not sanctioned by the
U.S. Government prior to Russia's full-scale invasion of Ukraine in
February 2022, their wealth was sometimes associated with corruption,
theft of state assets, or other illicit activity well before their
designation.
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\77\ See FinCEN Alert, FIN-2023-Alert002, FinCEN Alert on
Potential U.S. Commercial Real Estate Investments by Sanctioned
Russian Elites, Oligarchs, and Their Proxies, p.4 (Jan. 25, 2023).
In addition to Russian investors, investors tied to China and Saudi
Arabia have invested in U.S. private funds. See, e.g., The German
Marshall Fund of the United States, Policy Brief: An Effective
American Regime to Counter Illicit Finance (Dec. 2018), https://securingdemocracy.gmfus.org/wp-content/uploads/2018/12/An-Effective-American-Regime-to-Counter-Illicit-Finance.pdf.
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A Treasury review of select BSA reporting filed between January
2019 and June 2023 identified more than 20 investment advisers located
in the United States advising private funds where the adviser was
identified as having significant ties to Russian oligarch investors or
Russian-linked illicit activities. This review also identified 60
additional investment advisers located in the United States who managed
private funds in which identified Russian oligarchs have invested,
although there was no indication the adviser was engaged in any illicit
activity.
According to information available to the U.S. government, often, a
member of the Russian elite or their trusted proxy invests in a public
or private U.S. company with the assistance of a wealth management
firm, which is usually located in an offshore jurisdiction such as
Bermuda, the Caymans, or Cyprus, but services primarily Russian
customers. The wealth management firm invests that money in dollars
through the U.S. financial system, often into U.S. technology companies
in fields including biotechnology and artificial intelligence. The
scale of these investments is significant and may include billions of
dollars invested for a single Russian oligarch. These investments are
sometimes made directly by the foreign wealth management firm, and in
other instances through a U.S.-based RIA or ERA.
[[Page 12116]]
In other instances, funds may be routed through a consulting firm
or other entity acting as an investment adviser but not registered with
or reporting to the SEC or State regulator. For instance, on September
19, 2023, the SEC announced charges against Concord Management LLC
(Concord) and its owner and principal, Michael Matlin, for operating as
unregistered investment advisers to their only client--a wealthy former
Russian official widely regarded as having political connections to the
Russian Federation.\78\ As of January 2022, Concord and Matlin
allegedly managed investments for their sole client with an estimated
total value of $7.2 billion in 112 different private funds.
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\78\ In March 2022, the United Kingdom and the European Union
sanctioned Matlin and Concord's client and the client's assets were
subsequently frozen. The SEC's complaint alleges that, a month
prior, in February 2022, Concord and Matlin assisted the client in
his attempts to redeem investments and/or sell his securities
portfolio. See SEC, Press Release 2023-186, SEC Charges New York
Firm Concord Management and Owner with Acting as Unregistered
Investment Advisers to Billionaire Former Russian Official (Sep. 19,
2023).
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(c) Foreign State Actors Exploiting Investment Advisers To Threaten
U.S. National Security
Some strategic nation-state competitors to the United States, most
notably the PRC, may see private funds as a back door to acquire assets
of interest in the United States, such as equity stakes in companies
developing critical or emerging technologies. While there are certain
transactions for which notice must be provided to the interagency
Committee on Foreign Investment in the United States (CFIUS),\79\ most
transactions reviewed by CFIUS are filed voluntarily.\80\ Where
transactions are not voluntarily submitted to CFIUS for review, CFIUS
agencies actively work to identify those transactions, including
whether such transactions may be a covered transaction under the CFIUS
regulations and may raise national security considerations, and assess
whether to request that the parties file with CFIUS.\81\
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\79\ CFIUS is an interagency committee authorized to review
certain transactions involving foreign investment in the United
States in order to determine the effect of such transactions on the
national security of the United States.
\80\ See Treasury, ``Remarks by Assistant Secretary for
Investment Security Paul Rosen at the Second Annual CFIUS
Conference,'' (Sept. 14, 2023), https://home.treasury.gov/news/press-releases/jy1732.
\81\ Id.
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Foreign state-funded investment vehicles may seek to hide their
involvement in foreign investments through offshore legal entities and
intermediaries in an effort to gain access to sensitive technology,
processes, or knowledge that can enhance their domestic development of
microelectronics, artificial intelligence, biotechnology and
biomanufacturing, quantum computing, and advanced clean energy, among
others. These state-funded investment vehicles could persuade an
investment adviser to a private fund to grant them access to granular
details about the technology or processes used by a company in which
the fund is invested, including information that a limited partner
investor seeking only an economic return may not typically request.
PRC. According to the Federal Bureau of Investigation (FBI), the
PRC government routinely conceals its ownership or control of
investment funds to disguise efforts to steal technology or knowledge
and avoid notice to CFIUS.\82\ According to a report by the Office of
the U.S. Trade Representative, State-guided PRC venture capital fund
activity in the United States is motivated by the Made in China 2025
plan and the military-civil fusion strategy, directing investments
towards developing technology with dual-use capabilities.\83\ In 2016,
the PRC government explicitly endorsed the use of overseas venture
capital funds to invest in ``seed-based and start-up technology,''
demonstrating the link between the funds and government priorities.\84\
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\82\ See Hearing Before the U.S.-China Economic and Security
Review Commission, p.139, ``Chinese Investments in the United
States: Impacts and Issues for Policymakers'' Jan. 26, 2017, https://www.uscc.gov/sites/default/files/transcripts/Chinese%20Investment%20in%20the%20United%20States%20Transcript.pdf;
see also Remarks by FBI Director Christopher Wray, ``Countering
Threats Posed by the Chinese Government Inside the U.S.,'' Jan. 31,
2022, https://www.fbi.gov/news/speeches/countering-threats-posed-by-the-chinese-government-inside-the-us-wray-013122.
\83\ Office of the United States Trade Representative,
``Findings of the Investigation into China's Acts, Policies, and
Practices Related to Technology Transfer, Intellectual Property, and
Innovation under section 301 of the Trade Act of 1974,'' Mar. 22,
2018, 14-15 & 95-96, https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF.
\84\ PRC State Council, ``National 13th Five-Year Plan for the
Development of Strategic Emerging Industries,'' Nov. 29, 2016,
https://cset.georgetown.edu/publication/national-13th-five-year-
plan-for-the-development-of-strategic-emerging-industries/
#:~:text=During%20the%2013th%20Five%2DYear,healthy%20economic%20and%2
0social%20development.
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Russia. According to information available to the U.S. government,
Russian elites and government entities are moving hundreds of millions
of dollars annually through the U.S. financial system by using U.S. and
foreign venture capital firms to invest in U.S. technology companies. A
Treasury review of select BSA reporting identified several U.S. venture
capital firms with significant ties to Russian oligarch investors that
invested in firms developing emerging technologies with national
security applications. These include autonomous vehicle technology and
artificial intelligence systems, as well as contractors to the U.S.
military, intelligence, and other government agencies. Further,
according to information available to the U.S. government, the U.S.-
designated, state-owned Russian Venture Company, which is funded by the
U.S.-designated Russian Direct Investment Fund, endows Russian seed
funds to invest in emerging technology. The seed funds create a venture
capital company, often of a similar name to the seed fund and
registered outside of Russia, to invest in U.S. technology firms. The
U.S. government has also identified instances where the leadership of
certain investment firms has attempted to remove overt ties to Russia
or Russian names. Russian investors have obfuscated their connections
to Russia, including by relocating to other jurisdictions and changing
their names, to continue investing in U.S. technology companies through
venture capital vehicles.
D. Prior Rulemaking and Regulatory Guidance
FinCEN has previously proposed AML regulations for investment
advisers. On September 26, 2002, FinCEN published an NPRM proposing to
require that unregistered investment companies, to include private
funds, establish AML programs (Proposed Unregistered Investment
Companies Rule).\85\ This was followed by the May 5, 2003 NPRM
proposing to require certain investment advisers to establish AML
programs (First Proposed Investment Adviser Rule).\86\ Both of these
proposed rules would have defined these entities as ``financial
institutions'' under the BSA and required the implementation of AML
programs only; they did not propose suspicious activity reporting
requirements.
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\85\ See FinCEN, Anti-Money Laundering Programs for Unregistered
Investment Companies, 67 FR 60617 (Sept. 26, 2002).
\86\ See FinCEN, Anti-Money Laundering Programs for Investment
Advisers, 68 FR 23646 (May 5, 2003).
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In June 2007, FinCEN announced that it would be taking a fresh look
at how its broader AML regulatory framework was being implemented to
ensure that it was being applied effectively and efficiently across the
industries covered
[[Page 12117]]
by the BSA.\87\ In conjunction with this initiative, and given the
amount of time that had elapsed since initial publication of the
Proposed Unregistered Investment Companies Rule and the First Proposed
Investment Adviser Rule, FinCEN determined that it would not proceed to
apply AML requirements for these entities without undertaking further
public notice and comment, and therefore withdrew the proposed rules on
November 4, 2008.\88\
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\87\ See FinCEN, Withdrawal of the Notice of Proposed
Rulemaking; Anti-Money Laundering Programs for Unregistered
Investment Companies, 73 FR 65569 (Nov. 4, 2008); and FinCEN,
Withdrawal of the Notice of Proposed Rulemaking; Anti-Money
Laundering Programs for Investment Advisers, 73 FR 65568 (Nov. 4,
2008).
\88\ Id.
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On September 1, 2015, FinCEN published an NPRM ``to prescribe
minimum standards for . . . [AML] programs to be established by certain
investment advisers and to require such investment advisers to report
suspicious activity to FinCEN pursuant to the . . . BSA'' (Second
Proposed Investment Adviser Rule).\89\ This proposed rule would have
included RIAs within the definition of ``financial institution'' under
the BSA and required them to maintain AML programs, report suspicious
activity, and comply with other travel and recordkeeping requirements.
The Second Proposed Investment Adviser Rule would not have included
ERAs as financial institutions under the BSA.
---------------------------------------------------------------------------
\89\ See FinCEN, Anti-Money Laundering Program and Suspicious
Activity Report Filing Requirements for Registered Investment
Advisers, 80 FR 52680 (Sept. 1, 2015).
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Since 2015, the investment adviser industry has seen substantial
growth in assets under management and the expansion of new products and
services. At the time the Second Proposed Investment Adviser Rule was
published, there were approximately 12,000 RIAs reporting approximately
$67 trillion in AUM.\90\ As of June 30, 2023, that number had grown to
more than 15,000 RIAs with approximately $125 trillion in AUM.\91\
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\90\ Based on a Treasury review of Form ADV data as of December
31, 2015.
\91\ See supra n. 26.
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Private funds play an increasingly important role in the financial
system and continue to grow in size, complexity, and number. For
example, hedge funds engage in trillions of dollars in listed equity
and futures transactions each month. Private equity and other private
funds are involved in mergers and acquisitions, non-bank lending, and
corporate restructurings through leveraged buyouts and bankruptcies.
Venture capital funds provide funding to start-ups and early-stage
companies. There are approximately 5,500 RIAs who advise more than $20
trillion in private fund AUM.\92\ Over the past five years alone, the
number of private equity funds advised by RIAs increased 60 percent to
more than 24,000, while the number of venture capital funds advised by
RIAs increased by almost 300 percent, to more than 3,300 funds.\93\
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\92\ Id.
\93\ IAA Snapshot, supra n. 19 at Table 5E.
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Since 2015, the U.S. Government has also developed a more detailed
understanding of the illicit finance risks associated with the U.S.
investment adviser industry. As described in section II, investment
advisers have been exploited by sophisticated criminals, Russian
oligarchs, and U.S. strategic competitors.
Although the Second Proposed Investment Adviser Rule was not
formally withdrawn,\94\ Treasury does not intend to issue a final rule
based on it and is hereby withdrawing the Second Proposed Investment
Adviser Rule. Treasury is issuing this new NPRM to ensure that changes
in the risk and factual context relevant to the rulemaking since the
Second Proposed Investment Adviser Rule was published are taken into
account.
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\94\ Treasury withdrew the proposal from the Fall 2020 Unified
Agenda. See Anti-Money Laundering Program and Suspicious Activity
Reporting Filing Requirements for Investment Advisers, available at
https://www.regulations.gov/docket/FINCEN-2014-0003/unified-agenda.
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III. Scope of Proposed Rule
For all the reasons described above, FinCEN is proposing to cover
both RIAs and ERAs as ``financial institutions'' subject to AML/CFT
requirements. FinCEN is not proposing to cover State-registered
investment advisers because the Treasury risk assessment found few
examples of State-registered investment advisers being misused for
money laundering, terrorist financing, or other illicit financial
activities.\95\ However, FinCEN will continue to monitor activity
involving State-registered investment advisers for indicia of money
laundering, terrorist financing, or other illicit finance activities,
and may take appropriate steps to mitigate any such activity.
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\95\ See Treasury, Investment Adviser Illicit Finance Risk
Assessment, https://home.treasury.gov/system/files/136/US-Sectoral-Illicit-Finance-Risk-Assessment-Investment-Advisers.pdf.
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As discussed further below, this proposed rulemaking does not
impose a CIP requirement or a general requirement that investment
advisers identify and verify the beneficial ownership of legal entity
customers. Accordingly, the proposed rule would not subject investment
advisers to beneficial ownership information identification and
verification requirement under 31 CFR 1010.230.\96\ Under the BSA, any
CIP requirement for financial institutions that engage in financial
activities described in section 4(k) of the Bank Holding Company Act
``shall be prescribed jointly with each Federal functional regulator.''
\97\ This list of activities includes, among others, ``providing
financial, investment, or economic advisory services.'' \98\ Pursuant
to these provisions, any future application of CIP requirements would
be proposed jointly with the SEC in a separate rulemaking. In addition,
FinCEN intends to amend the CDD Rule to bring it into conformance with
the Corporate Transparency Act.\99\
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\96\ As described below, the proposed revised Sec.
1010.605(e)(1) would expressly provide that an investment adviser
would not be considered a ``covered financial institution'' for the
purposes of Sec. 1010.230. See infra section IV.H.1.
\97\ 31 U.S.C. 5318(l)(4).
\98\ 12 U.S.C. 1843(k)(4)(C).
\99\ FinCEN is required to revise the CDD Rule under the
Corporate Transparency Act. Sec. 6403(d)(1), AML Act. (``Not later
than 1 year after the effective date of the regulations promulgated
under section 5336(b)(4) of title 31, United States Code, as added
by subsection (a) of this section, the Secretary of the Treasury
shall revise the final rule entitled `Customer Due Diligence
Requirements for Financial Institutions' . . . .'').
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IV. Section-by-Section Analysis
FinCEN is proposing to: (1) include certain types of investment
advisers (both RIAs and ERAs) within the definition of ``financial
institution'' in the regulations implementing the BSA, and add a
definition of investment adviser to reflect those covered types; and
(2) require such investment advisers to (a) establish AML/CFT programs,
to include risk-based procedures for conducting ongoing CDD; (b) report
suspicious activity and file CTRs; (c) maintain records of originator
and beneficiary information for certain transactions; (d) apply
information-sharing provisions between and among FinCEN, law
enforcement, agencies, and certain financial institutions; and (e)
implement special due diligence requirements for correspondent and
private banking accounts and special measures under section 311 of the
USA PATRIOT Act. These proposals are discussed in greater detail below.
A. Definitions
FinCEN is proposing two changes to 31 CFR 1010.100, the general
definitions section of its regulations. First, this proposed rule would
amend 1010.100(t) to add ``investment adviser'' to the definition of
``financial institution.''
[[Page 12118]]
Second, it would add a new provision to 1010.100 defining the term
``investment adviser.''
1. Adding ``Investment Adviser'' to the ``Financial Institution''
Definition
The BSA expressly defines various entities as ``financial
institutions,'' \100\ while also providing Treasury with the authority
to define additional entities as financial institutions in its
regulations at 31 CFR 1010.100(t). Specifically, the BSA authorizes
FinCEN to define additional types of businesses as financial
institutions if FinCEN determines that such businesses engage in any
activity ``similar to, related to, or a substitute for'' activities in
which any of the enumerated financial institutions are authorized to
engage.\101\ Although ``investment adviser'' is not one of the
specifically enumerated financial institutions in the BSA, FinCEN is
proposing to make such a determination with respect to the defined set
of investment advisers, and thereby add investment advisers to Sec.
1010.100(t)'s definition of financial institution.
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\100\ 31 U.S.C. 5312(a)(2), (c)(1).
\101\ 31 U.S.C. 5312(a)(2)(Y). FinCEN may also designate
businesses ``whose cash transactions have a high degree of
usefulness in criminal, tax, or regulatory matters'' as financial
institutions. Id. 5312(a)(2)(Z).
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Investment advisers provide services that are similar or related to
services authorized to be provided by BSA-defined financial
institutions. Many investment advisers provide advice to clients who
have granted the adviser the power to manage assets on a discretionary
basis, which is similar or related to services provided by other BSA-
defined institutions, such as broker-dealers or banks. Indeed, many
investment advisers provide asset management services that are similar
to, and often substituted for, the asset management services that are
provided by banks and other financial institutions, such that advisers
may compete directly with asset management services provided by certain
banks. Investment advisers also often provide services that can
substitute for certain products offered by investment companies or
insurance companies. For example, investment advisers can sponsor and
provide advisory services to pooled investment vehicles such as private
funds. As another example, many investment advisers sponsor and provide
advisory services to mutual funds and advise on the purchase or sale of
mutual fund shares, similar to banks or broker dealers that provide
recommendations on mutual fund shares.
Moreover, investment advisers often work closely with, or are
otherwise closely associated with, BSA-defined financial institutions.
For example, investment advisers work closely with financial
institutions when they direct broker-dealers to purchase or sell client
securities, and therefore engage in activities that are closely related
to the activities of covered financial institutions. In addition,
investment advisers are frequently owned by or under common ownership
with banks, broker-dealers, and other financial institutions. For
example, approximately 20 percent of RIAs and seven percent of ERAs are
dually registered as a broker-dealer, licensed as a bank, or affiliated
with a bank or broker dealer.\102\ Investment advisers typically rely
on broker-dealers, banks, and other financial institutions to perform
vital functions for them, such as retaining custody of client funds or
executing trades of securities.\103\ Broker-dealers may recommend
securities transactions to customers as well.\104\ Accordingly, even
investment advisers that lack direct relationships with banks, broker-
dealers, or other types of financial institutions engage in activities
that are ``similar to'' the types of services authorized to be provided
by certain financial institutions.
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\102\ See supra n. 26.
\103\ See, e.g., SEC, Commission Interpretation Regarding
Standard of Conduct for Investment Advisers, Investment Advisers Act
Release No. 5248 (Jun. 5, 2019), 84 FR 33669, 33674-75 (Jul. 12,
2019) (discussing an investment adviser's duty to seek best
execution of a client's transactions where the investment adviser
has the responsibility to select broker-dealers to execute client
trades)
\104\ See 15 U.S.C. 80b-2(a)(11)(C) (excluding from the
definition of ``investment adviser'' under the Advisers Act any
broker or dealer whose performance of advisory services is ``solely
incidental to the conduct of his business as a broker or dealer and
[the broker or dealer] receives no special compensation therefor'');
see also SEC, Commission Interpretation Regarding the Solely
Incidental Prong of the Broker-Dealer Exclusion from the Definition
of Investment Adviser, Investment Advisers Act Release No. 5249
(Jun. 5, 2019), 84 FR 33681 (Jul. 12, 2019). 17 CFR 240.15l-1.
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Further, legislative history during drafting of the USA PATRIOT Act
indicates that RIAs are sufficiently similar to certain other financial
institutions that Treasury could require them to file SARs: ``The
Committee [on Financial Services] notes that, under the Bank Secrecy
Act, the Secretary currently has the authority to require Suspicious
Activity Reports for all entities similar to futures commission
merchants, commodity trading advisors, and commodity pool operators,
namely registered investment advisers and registered investment
companies.'' \105\
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\105\ House Report 107-250(I), Financial Anti-Terrorism Act of
2001, 2001 WL 1249988 at *66 (Oct. 17, 2001); see also Public Law
107-31, Title III section 321 (Oct. 26, 2001) (section of USA
PATRIOT Act adding futures commission merchants, commodity trading
advisors, and commodity pool operators to the definition of
``financial institutions'' for purposes of 31 U.S.C. 5312(a)).
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Accordingly, FinCEN hereby determines that investment advisers
engage in activities that are ``similar to, related to, or a substitute
for'' financial services that other BSA-defined financial institutions
are authorized to engage in and, therefore, may be properly included as
a ``financial institution'' subject to the requirements of the BSA.
2. Adding a Definition of ``Investment Adviser''
FinCEN is also proposing to add a definition of ``investment
adviser'' to 31 CFR 1010.100 to clearly define who qualifies as a
covered adviser--and thus as a ``financial institution'' under these
proposed amendments to FinCEN regulations. The proposed definition of
``investment adviser'' is: ``[a]ny person who is registered or required
to register with the SEC under section 203 of the Advisers Act (15
U.S.C. 80b-3(a)), or any person that currently is exempt from SEC
registration under section 203(l) or 203(m) of the Investment Advisers
Act (15 U.S.C. 80b-3(l), (m)).'' \106\ In other words, under this
proposed definition, an investment adviser would be any RIA (those
registered or required to register) or ERA (those exempt from SEC
registration under the listed provisions).
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\106\ See 15 CFR 275.203(l)-1; 15 CFR 275.203(m)-1.
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The proposed definition relies on well-established and understood
terms and definitions used in the Advisers Act and its implementing
regulations to define who would be an investment adviser under FinCEN
regulations. FinCEN believes that incorporating existing and well-
understood regulatory definitions into its definition of investment
adviser would simplify the investment advisers' determinations as to
whether they are subject to the proposed requirements. FinCEN requests
comment on whether the proposed definition of ``investment adviser'' is
sufficiently clear, or whether some other definition may be preferable.
FinCEN also requests comment on whether the proposed definition
includes classes of investment advisers or certain services or
activities provided by investment advisers that present a very low risk
for money laundering,
[[Page 12119]]
terrorist financing, or other illicit finance activity such that they
should be excluded from the definition, or whether the proposed
definition fails to include a type of adviser that presents a risk.
(a) Registered Investment Advisers
Including RIAs within the proposed definition of investment adviser
would align FinCEN's regulatory framework with the existing framework
under the Advisers Act and would also allow FinCEN to work with the SEC
to develop consistent application and examination of the AML/CFT
requirements to such advisers. Generally, an investment adviser's
amount of assets under management determine whether it is required to
register or is prohibited from registering with the SEC.\107\ 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.\108\ Per the Dodd-Frank
Act and SEC rules, a ``large'' adviser has $110 million or more in
regulatory assets under management, and is required to register with
the SEC. These are RIAs that would be included in the investment
adviser definition in the proposed rule.\109\ FinCEN notes that large
advisers would comprise a substantial majority of the total number of
investment advisers that are included in the definition of investment
adviser for purposes of the proposed rule.\110\ FinCEN requests comment
on whether the definition of investment adviser should apply to non-
U.S. advisers registered or required to register with the SEC, or who
report to the SEC on Form ADV.
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\107\ See SEC, Rules Implementing Amendments to the Investment
Advisers Act of 1940, Investment Advisers Act Release No. 3221 (Jun.
22, 2011), 76 FR 42950, 42955 (Jul. 19, 2011).
\108\ See id.; see also Instructions for Part 1A, Item 5.F of
Form ADV.
\109\ An investment adviser that is registered with the SEC on a
basis other than its AUM would also be an ``investment adviser''
under the proposed rule and subject to the proposed requirements.
\110\ Generally, a mid-sized adviser has $25 million or more but
less than $110 million in regulatory assets under management and is
registered with the State where it maintains its principal office
and place of business. A small adviser has less than $25 million in
regulatory assets under management and is regulated or required to
be regulated in the State where it maintains its principal office
and place of business. See 15 U.S.C. 80b-3A(a)(1). Mid-sized and
small advisers are generally prohibited from registering with the
SEC, unless an exemption from the prohibition on SEC registration is
available (see 17 CFR 275.203A-2), and therefore are unlikely to be
covered by the proposed definition of ``investment adviser'' in the
proposed rule as RIAs.
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(b) Exempt Reporting Advisers
FinCEN is also including ERAs in the definition of investment
adviser under the proposed rule for the reasons described in section
II.C above. In addition, ERAs have less detailed reporting requirements
than RIAs, are not required to file Form PF, and are not examined by
the SEC on a regular basis.\111\ Further, exempt venture capital
advisers are able to rely on a registration exemption that is not
limited by the amount of AUM. FinCEN requests comment on whether ERAs
should be excluded from the proposed definition of ``investment
adviser,'' and if ERAs are excluded, how could FinCEN otherwise address
the money laundering, terrorist financing, and other illicit finance
risk associated with ERAs. FinCEN also requests comment on whether
there are differences in the risks associated with ERAs who advise
private funds versus those that advise venture capital funds.
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\111\ See 76 FR 42950, 42963, n.188.
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(c) Other Investment Advisers
FinCEN recognizes that different investment advisers included
within the proposed definition may have different degrees of money
laundering, terrorist financing, or other illicit finance risk. As
discussed at greater length below, the AML/CFT program requirement is
risk-based, and FinCEN anticipates that the burden of establishing an
AML/CFT program, filing SARs, and complying with the other requirements
of the proposed rule would be commensurate with an adviser's risk
profile. As noted, the proposed definition of ``investment adviser''
would include certain non-U.S. investment advisers that are physically
located abroad (i.e., do not have a branch, office, or staff in the
United States), but are nonetheless registered or required to register
with the SEC (for RIAs) or file Form ADV (for ERAs). Coverage of these
non-U.S. investment advisers is discussed further at section IV.E.7.
While FinCEN is limiting the proposed definition to RIAs and ERAs,
FinCEN recognizes that other types of investment advisers or other
entities that provide investment advisory services may present risks to
the U.S. financial system of money laundering, terrorist financing, and
other types of financial crimes, or otherwise pose a threat to U.S.
national security. FinCEN, therefore, may consider future rulemakings
to expand the application of the BSA to include other investment
advisers or similar entities not covered by the proposed definition.
FinCEN requests comment on whether other types of investment advisers
or entities should also be subject to the proposed rule.
B. Delegation of Examination Authority to the Securities and Exchange
Commission
FinCEN has overall authority for enforcement of compliance with the
BSA and its implementing regulations.\112\ FinCEN, however, may
delegate examination authority to appropriate agencies while retaining
authority for the coordination and direction of procedures and
activities of these agencies.\113\ FinCEN has previously delegated
examination authority for various financial institutions, as reflected
at 31 CFR 1010.810(b).
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\112\ Treasury Order 180-1, para. 3; 31 CFR 1010.810(a).
\113\ Treasury Order 180-1, paras. 3(b), 4(b); 31 CFR
1010.810(a); 31 U.S.C. 5318(a)(1).
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FinCEN is proposing to amend 31 CFR 1010.810(b) to add investment
advisers to the list of financial institutions for which the SEC has
the authority to examine for compliance with FinCEN's regulations
implementing the BSA. Persons and entities meeting the proposed
definition of investment adviser thus would fall under this provision
and be subject to SEC examination for compliance with FinCEN
regulations. The SEC has expertise in the regulation of investment
advisers. The SEC is the Federal functional regulator for certain
investment advisers and is responsible for examining investment
advisers for compliance with the Federal securities laws, including the
Advisers Act and the SEC rules promulgated under those laws.\114\
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.\115\
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\114\ See 15 U.S.C. 6809(2)(F); 31 CFR 1010.100(r)(6); see also
15 U.S.C. 80b-1 et seq. and the rules thereunder, 17 CFR part 275.
\115\ See 31 CFR 1010.810(b)(6).
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Accordingly, the proposed rule would designate the SEC as examiner
of investment advisers for compliance with the proposed rule.
C. Investment Advisers' Proposed Obligation To File CTRs Instead of
Form 8300
Under FinCEN's regulations that apply to a broad range of persons--
not just financial institutions--investment
[[Page 12120]]
advisers are currently required to file reports for the receipt of more
than $10,000 in currency and certain negotiable instruments using joint
FinCEN/Internal Revenue Service Form 8300.\116\ By defining investment
advisers as ``financial institutions'' under the BSA, the proposed rule
would require investment advisers to file CTRs with FinCEN pursuant to
31 CFR 1010.311 instead of filing reports using Form 8300.\117\
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\116\ 31 CFR 1010.330; 26 CFR 1.6050I-1. ``Currency'' includes
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).
\117\ See 31 CFR 1010.330(a) (stating that Sec. 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 31 CFR
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 to such transactions.
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The BSA authorizes FinCEN to promulgate regulations requiring
financial institutions to file reports when they participate in certain
types of financial transactions.\118\ Pursuant to this authority, 31
CFR 1010.311 requires ``financial institutions'' (other than casinos)
to file CTRs for ``each deposit, withdrawal, exchange of currency or
other payment or transfer, by, through, or to such financial
institution which involves a transaction in currency of more than
$10,000,'' unless subject to an applicable exemption. FinCEN seeks to
extend this requirement to investment advisers under the proposed rule.
This proposed rule would also add several provisions, Sec. Sec.
1032.310 to 1032.315, specifying how investment advisers should fulfill
their proposed CTR obligations.
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\118\ See, e.g., 31 U.S.C. 5313(a); 31 U.S.C. 5326.
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The threshold in 31 CFR 1010.311 applies to transactions in
currency of more than $10,000 conducted during a single business
day.\119\ A financial institution must treat multiple transactions
conducted in one business day as a single transaction if the financial
institution has knowledge that the transactions are conducted by or on
behalf of the same person.\120\ This same requirement would extend to
investment advisers.
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\119\ See 31 CFR 1010.311, 1010.313(b). Multiple transactions
must be treated as a single transaction if they are conducted by or
on behalf of the same person and result in cash in or cash out of
more than $10,000 during any one business day. A Form 8300,
meanwhile, must be filed when currency is received in one
transaction or two or more related transactions. Transactions
conducted between a payer (or its agent) and a recipient in a 24-
hour period would be treated as related. Furthermore, a distinction
is drawn between transactions and the receipt of payments.
Installment payments made within a period of 12 months may need to
be aggregated and reported on a Form 8300. See 31 CFR
1010.330(b)(3).
\120\ Id.
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To avoid duplicative requirements, investment advisers would no
longer have to report applicable transactions involving certain
negotiable instruments reportable on Form 8300. Moreover, since an
investment adviser would be required to report suspicious transactions
under the SAR rule proposed in this rulemaking, investment advisers
would no longer need to use Form 8300 to voluntarily report suspicious
transactions.\121\ Finally, imposing CTR and SAR requirements rather
than a Form 8300 requirement is consistent with the obligations of
certain other financial institutions, such as banks, broker-dealers,
and mutual funds.
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\121\ 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 suspicious transaction exceeds the
threshold amount.
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D. Proposed Recordkeeping Requirements for Investment Advisers
FinCEN has broad authority to impose recordkeeping requirements on
financial institutions under the BSA.\122\ Pursuant to this authority,
FinCEN has issued several recordkeeping regulations, codified as 31 CFR
part 1010, subpart D (Sec. Sec. 1010.400 to 1010.440), which apply
broadly to financial institutions, subject to specified exceptions. By
defining RIAs and ERAs as financial institutions, this proposed rule
would apply these recordkeeping regulations to investment advisers.
Specifically, 31 CFR 1032.410 (cross-referencing 31 CFR 1010.410) would
require investment advisers to comply with the Recordkeeping and Travel
Rules, which are codified at 31 CFR 1010.410(e) and 31 CFR 1010.410(f),
respectively, for the purposes of this proposed rule.\123\ The proposed
regulations would not require investment advisers to comply with these
recordkeeping requirements with respect to any mutual fund that it
advises.\124\
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\122\ See 12 U.S.C. 1953; 31 U.S.C. 5311; and 31 U.S.C.
5312(a)(2).
\123\ The Recordkeeping Rule is codified at 31 CFR 1010.410(e)
and 1020.410(a), but only 1010.410(e) is relevant here: 1020.410(a)
describes the recordkeeping requirements for banks, while those for
nonbank financial institutions are described in 1010.410(e). The
Travel Rule, as codified at 31 CFR 1010.410(f), applies to both bank
and nonbank financial institutions. See FinCEN, Board of Governors
of the Federal Reserve System, Amendment to the Bank Secrecy Act
Regulations Relating to Recordkeeping for Funds Transfers and
Transmittals of Funds by Financial Institutions, 60 FR 220 (Jan. 3,
1995); FinCEN, Amendment to the Bank Secrecy Act Regulations
Relating to Orders for Transmittals of Funds by Financial
Institutions, 60 FR 234 (Jan. 3, 1995).
\124\ Specifically, proposed 31 CFR 1032.400 would permit an
investment adviser to deem requirements in Subpart D to be satisfied
for any mutual fund it advises that is subject to these same
reporting requirements under another provision of Subpart D.
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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
``travels'' with the transmittal to the next financial institution in
the payment chain.\125\ The Recordkeeping and Travel Rules apply to
transmittals of funds that equal or exceed $3,000. With certain
exceptions, ``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.\126\
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\125\ See 31 CFR 1010.410(e), (f); 31 CFR 1020.410(a). Financial
institutions are also required to retain records for five years. See
31 CFR 1010.430(d).
\126\ See 31 CFR 1010.100(ddd) (defining ``transmittal of
funds''); see also 31 CFR 1010.100(aa), (qq), (ggg) (defining
``intermediary financial institution,'' ``recipient's financial
institution,'' and ``transmittor's financial institution'' to
include both bank and nonbank financial institutions).
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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.\127\ The Recordkeeping Rule also requires the recipient's
financial institution (and in certain instances, the transmittor's
financial institution) to obtain or retain identifying information on
the recipient.\128\ And the Travel Rule requires that certain
information obtained or retained ``travels'' with the
[[Page 12121]]
transmittal order through the payment chain.\129\
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\127\ See 31 CFR 1010.410(e)(1)(i), (e)(2).
\128\ See 31 CFR 1010.410(e)(1)(iii), (e)(3) (information that
the recipient's financial institution must obtain or retain).
\129\ See 31 CFR 1010.410(f) (information that must ``travel''
with the transmittal order); 31 CFR 1010.100(eee) (defining
``transmittal order'').
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Under the proposed rule, however, some transmittals involving
investment advisers would fall within an existing exception to the
Recordkeeping and Travel Rules designed to exclude transmittals of
funds from these Rules' requirements when certain categories of
financial institutions are the transmitter and recipient.\130\ The
proposed application of this exception to investment advisers is
intended to provide investment advisers with treatment similar to that
of banks, brokers or dealers in securities, futures commission
merchants, introducing brokers in commodities, and mutual funds.
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\130\ See 31 CFR 1010.410(e)(6), (f)(4); 31 CFR 1020.410(a)(6).
As relevant here, Sec. 1010.410(e)(6)(i) excludes from the
requirements of the Recordkeeping Rule ``[t]ransmittals of funds
where the transmitter and the recipient'' are certain types of
listed financial institutions. Section 1010.410(f)(4) excludes these
same transmittals from the Travel Rule. The proposed rule would
amend Sec. 1010.410(e)(6) to add ``investment advisers'' to its
list of financial institutions.
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Additionally, FinCEN recognizes that investment advisers operate
varying business models and, that in some circumstances, an adviser
would not conduct transactions that meet the definition of
``transmittal order.'' For example, in some advisory relationships,
when an investment adviser receives instructions from a customer, the
investment adviser would not ``be reimbursed by debiting an account of,
or otherwise receiving payment from,'' the customer, such that the
investment adviser's receipt of instructions from a customer would not
meet the definition of transmittal order.\131\
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\131\ See 31 CFR 1010.100(eee)(2).
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Because FinCEN is proposing to include investment advisers in the
definition of financial institutions, investment advisers would be
required to comply with the Recordkeeping and Travel Rules when they
engage in transactions that meet the definition of a transmittal order.
FinCEN understands that the collection of at least some of this
information would be required for accounting or other purposes and
seeks comment on the extent to which investment advisers or other BSA-
defined financial institutions regularly collect information that would
be required under the Recordkeeping and Travel Rules. Similarly, FinCEN
seeks comment on understanding the structures that investment advisers
use to be credited by customers who seek to wire funds out of their
accounts with the investment adviser. FinCEN seeks comment on how
investment advisers work with qualified custodians to maintain separate
accounts to manage customers' funds, including for wire transfers.
FinCEN is also seeking comment on whether investment advisers should be
required to comply with the Recordkeeping and Travel Rules as proposed,
or if the Recordkeeping and Travel Rules should only apply in certain
circumstances.
Finally, the proposed rule 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.\132\ These requirements currently
apply to transactions by other BSA-defined financial institutions in
amounts exceeding $10,000.\133\
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\132\ See 31 CFR 1010.410(a)-(c). Financial institutions must
retain these records for a period of five years. 31 CFR 1010.430(d).
\133\ See 31 CFR 1010.410(a)-(c).
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E. Anti-Money Laundering and Countering the Financing of Terrorism
Programs
The BSA requires financial institutions to establish reasonably
designed risk-based AML/CFT programs to combat the laundering of money
and financing of terrorism through the institution.\134\ The Annunzio-
Wylie Anti-Money Laundering Act of 1992 amended the BSA by authorizing
Treasury to issue regulations requiring financial institutions, as
defined in BSA regulations, to maintain ``minimum standards'' of an
anti-money laundering program.\135\ These anti-money laundering
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
function to test programs.\136\ The USA PATRIOT Act further amended the
BSA to expand AML program rules applicable to banks to cover certain
other industries.\137\ The requirements for an anti-money laundering
program were further amended by section 6101(b) of the AML Act of 2020
(AML Act), which among other things, expanded the BSA's program rule
requirement to include a reference to CFT in addition to AML.\138\
FinCEN intends to implement more specific changes to AML/CFT program
requirements as a result of section 6101(b) of the AML Act through a
separate rulemaking process.\139\ FinCEN does not intend to address
those more specific changes as part of this rulemaking.
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\134\ 31 U.S.C. 5311(2), 5318(h)(1).
\135\ Annunzio-Wylie Anti-Money Laundering Act, Title XV of the
Housing and Community Development Act of 1992, Public Law 102-550.
\136\ 31 U.S.C. 5318(h)(1)(A)-(D).
\137\ Section 352(a) of the Act, which became effective on April
24, 2002, amended 31 U.S.C. 5318(h).
\138\ Public Law 116-283 (Jan. 1, 2021); see 31 U.S.C.
5318(h)(4)(D) (as amended by AML Act section 6101(b)(2)(C)).
\139\ See FinCEN Regulatory Agenda (Spring 2023), Establishment
of National Exam and Supervision Priorities, available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202304&RIN=1506-AB52.
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The BSA authorizes FinCEN, after consultation with the appropriate
Federal functional regulator (for investment advisers, the SEC), to
further prescribe minimum standards for such AML/CFT programs.\140\ In
developing this proposed rule, FinCEN consulted and coordinated with
the SEC staff, including regarding the statutorily specified factors
set out in 31 U.S.C. 5318(h)(2)(B). These factors are:
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\140\ 31 U.S.C. 5318(h)(2)(A).
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financial institutions are spending private compliance
funds for a public and private benefit, including protecting the United
States financial system from illicit finance risks;
the extension of financial services to the underbanked and
the facilitation of financial transactions, including remittances,
coming from the United States and abroad in ways that simultaneously
prevent criminal persons from abusing formal or informal financial
services networks are key policy goals of the United States;
effective anti-money laundering and countering the
financing of terrorism programs safeguard national security and
generate significant public benefits by preventing the flow of illicit
funds in the financial system and by assisting law enforcement and
national security agencies with the identification and prosecution of
persons attempting to launder money and undertake other illicit
activity through the financial system;
anti-money laundering and countering the financing of
terrorism programs should be--
[cir] reasonably designed to assure and monitor compliance with the
requirements of the BSA and regulations promulgated under the BSA; and
[cir] risk-based, including ensuring that more attention and
resources of financial institutions should be directed toward higher-
risk customers and activities, consistent with the risk profile of a
financial institution, rather than toward lower-risk customers and
activities.
[[Page 12122]]
FinCEN has considered these factors in section 5318(h)(2)(B) in the
drafting of this proposed rule. In proposing this rule, FinCEN has
considered the fact that comprehensive AML/CFT requirements for
investment advisers, which would require investment advisers to have
effective AML/CFT programs and subject them to SAR reporting
requirements, would aid in preventing the flow of illicit funds in the
financial system and in assisting law enforcement and national security
agencies with the identification and prosecution of those who attempt
to launder money and undertake other illicit financial activity.
Additionally, FinCEN recognizes that AML/CFT programs at investment
advisers should be reasonably designed and risk-based consistent with
investment advisers' respective risk profiles, and therefore is
proposing an AML/CFT program rule that requires policies, procedures,
and internal controls reasonably designed to prevent the investment
adviser from being used for money laundering, terrorist financing, or
other illicit finance activities, as well as risk-based procedures that
consider an investment adviser's risk profile. Further, as discussed in
the Regulatory Analysis at section VII, FinCEN has analyzed the
financial costs to investment advisers in imposing AML/CFT obligations,
including AML/CFT program requirements and SAR filing requirements, and
has determined that the public and private benefit to this proposed
rule would outweigh the private compliance costs.\141\
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\141\ Further discussion relevant to each factor may be found
at: Factor (i): the regulatory impact analysis at section VII and
other discussions of the costs and benefits of the proposed rule;
Factor (ii): we believe that this factor is not relevant to the
proposed rule because investment advisers generally do not provide
services to the unbanked, process remittances, or participate in
informal financial networks. This may be inferred from the risk
discussion at section II.C and accompanying discussions of the
structure of the investment advisory industry; and Factor (iii): the
risk analysis at section II.C; Factor (iv): the risk analysis at
section II.C and the discussion of building upon existing
requirements and examination programs in this section and at section
IV.B.
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This proposed rule, by designating investment advisers as financial
institutions, would subject investment advisers to AML/CFT program
requirements, as reflected in proposed Sec. 1032.210.\142\
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\142\ Additionally, 31 CFR subpart B contains general provisions
applicable generally to financial institutions' AML/CFT programs.
Proposed Sec. 1032.200 would subject investment advisers those
general provisions in subpart B.
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Investment advisers are already subject to other regulations
similar in certain ways to the AML/CFT program requirements FinCEN is
proposing, and thus should be well-positioned to extend their practices
to incorporate proposed AML/CFT requirements. RIAs are currently
subject to Federal securities laws, which require the establishment of
a variety of policies, procedures, and controls. For example, the
Advisers Act requires an RIA to maintain certain books and records, as
prescribed by the SEC.\143\ Under 17 CFR 275.204-2, an RIA is required
to keep certain books and records that relate to its investment
advisory business.\144\ Under 17 CFR 275.203-1 and 275.204-4, RIAs and
ERAs, respectively, 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.\145\ SEC
rules further require RIAs to adopt and implement written policies and
procedures reasonably designed to prevent violations of the Advisers
Act and the rules that the SEC has adopted under that Act.\146\ RIAs
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.\147\
ERAs are also subject to Federal securities laws governing the
securities industry, required to complete and submit some sections of
Form ADV, and comply with other select requirements of the Advisers
Act.\148\ While ERAs may not have the full compliance infrastructure
that RIAs have, their existing compliance obligations nonetheless offer
a point of reference and relevant experience for implementing the AML/
CFT requirements in the proposed rule.
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\143\ 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).
\144\ See 17 CFR 204-2 (books and records to be maintained by
investment advisers).
\145\ See, e.g., 15 U.S.C. 80b-6(1)-(2)), (4) (prohibiting any
investment advisers from engaging in any activity that would defraud
a client or prospective client). See also 17 CFR 275.206(4)-8
(prohibiting any investment advisers from making false or misleading
statements to, or otherwise defrauding, investors or prospective
investors to pooled investment vehicles).
\146\ 17 CFR 275.206(4)-7(a).
\147\ 17 CFR 275.206(4)-7(b), (c).
\148\ See, e.g., 15 U.S.C. 80b-6(1)-(2), (4); 17 CFR 275.204-4;
17 CFR 275.206(4)-5; 17 CFR 275.206(4)-8.
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As FinCEN has noted, the AML/CFT program requirement is not a one-
size-fits-all requirement but rather is risk-based and is intended to
give investment advisers the flexibility to design their programs to
identify and mitigate the specific risks of the advisory services they
provide and the customers they advise. As such, ERAs would be able to
tailor their AML/CFT programs to the specific risks, activities, and
operations associated with their advisory business. Accordingly, FinCEN
contemplates that investment advisers, as defined in the proposed rule,
would be able to build upon existing policies, procedures, and internal
controls, or the processes undertaken to establish those policies,
procedures, and internal controls, to comply with the proposed AML/CFT
requirements.
Moreover, some investment advisers have already implemented AML/CFT
programs either because they are dually registered as a broker-dealer,
licensed as a bank, or affiliated with a broker-dealer or bank, or in
conjunction with a SIFMA No-Action Letter permitting broker-dealers to
rely on RIAs to perform some or all aspects of broker-dealers' CIP
obligations.\149\ For instance, according to the 2016 Investment
Management Compliance Testing Survey of RIAs conducted by ACA
Compliance Group and the Investment Adviser Association, 76 percent of
participants had adopted AML policies, and 40 percent of participants
had adopted AML programs similar to the AML program requirements
proposed in the Second Proposed Investment Adviser Rule.\150\ FinCEN
requests comment on what CDD procedures RIAs and/or ERAs already have
in place to comply with the SIFMA No-Action Letter.
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\149\ See SIFMA No-Action Letter, supra n. 52. 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)).
\150\ See 2016 Investment Management Compliance Testing Survey
(2016 IMCTS Survey), p.21, https://www.investmentadviser.org/eweb/docs/Publications_News/Reports_and_Brochures/Investment_Management_Compliance_Testing_Surveys/2016IMCTppt.pdf.
This survey included responses from compliance officers at 730 RIAs
and is the most recent IMCTS survey to have asked detailed questions
about AML policies and programs.
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1. Overview of AML/CFT Program Requirement
Section 1032.210(a)(1) of the proposed rule would require each RIA
and ERA to develop and implement a written AML/CFT program that is
risk-based and reasonably designed to prevent the investment adviser
from being used for money laundering, terrorist financing, or other
illicit finance activities. Each RIA and ERA would also be required to
make its AML/CFT program available for inspection by FinCEN or the SEC.
The minimum requirements for the AML/CFT program are set forth in
[[Page 12123]]
Sec. 1032.210(b) and discussed in greater detail below.
FinCEN reiterates that the proposed AML/CFT program requirement is
not a one-size-fits-all requirement but is risk-based and must be
reasonably designed. The ``risk-based and reasonably designed''
approach of the proposed rule is intended to give investment advisers
the flexibility to design their programs so that they are commensurate
with the specific risks of the advisory services they provide and the
customers they advise.\151\ For example, large firms may assign
responsibilities of the individuals and departments carrying out each
aspect of the AML/CFT program, while smaller firms would be expected to
adopt procedures that are consistent with their (often) simpler, more
centralized organizational structures. This flexibility is designed to
ensure that all firms subject to FinCEN's AML/CFT 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, terrorist financing, or other
illicit finance activities and to achieve and monitor compliance with
the applicable provisions of the BSA and FinCEN's implementing
regulations. FinCEN requests comment on whether existing requirements
under the Advisers Act or existing policies and procedures to implement
OFAC sanctions could assist investment advisers in complying with the
proposed AML/CFT requirements. FinCEN also requests comment on whether
any proposed requirements are duplicative of any existing requirements.
Finally, FinCEN requests comment on whether there are certain services
or activities provided by investment advisers where applying AML/CFT
requirements would result in information of limited value to law
enforcement and regulators.
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\151\ The legislative history of the BSA reflects that Congress
intended that each financial institution should have some
flexibility to tailor its program to fit its business, considering
factors such as size, location, activities, and risks or
vulnerabilities to money laundering. 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).
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2. Scope
As described above, the proposed rule would require all RIAs and
ERAs to develop an AML/CFT program, and that program would be required
to cover all advisory activities, with one exception: the program need
not cover activities undertaken with respect to mutual funds, which
have their own obligations under the BSA.\152\ As detailed below,
advisory activities with respect to mutual funds would be exempt from
the AML/CFT program requirements that would be applied in the proposed
rule.
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\152\ See 31 CFR part 1024.
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An investment adviser would apply an AML/CFT program to all
advisory activities other than with respect to mutual funds. Advisory
activities subject to an AML/CFT program would include, for example,
the management of customer assets, the provision of financial advice,
the execution of transactions for customers, as well as other advisory
activities. The requirements of the proposed rule would not apply to
non-advisory services. One example of this would be in the context of
private equity funds: fund personnel may play certain roles with
respect to the portfolio companies in which the fund invests.
Activities undertaken in connection with those roles (e.g., making
managerial/operational decisions about portfolio companies) would not
be ``advisory activities'' for purposes of the rule. FinCEN requests
comment on whether certain advisory activities pose a lower risk in all
circumstances and on the challenges for advisers in complying with the
proposed role when engaged in such activities.
Certain commenters on the Second Proposed Investment Adviser Rule
proposed to exempt some advisory activities, such as advising clients
without managing client assets and acting as a subadviser, on the
ground that such activities are lower risk. Assessing the risk of an
adviser's activities requires appreciation of the full context of the
activity. For example, subadvisers and advisers who do not manage
assets may nonetheless afford their clients access to the U.S.
financial system, inadvertently guide the layering or integration of
illicit proceeds or other illicit finance activity, or have
relationships that provide insight to the investment adviser's AML/CFT
program. FinCEN is therefore proposing to include those activities
within the scope of this proposed rule. As discussed in the comment
request section below, FinCEN requests comment on whether certain
subadvisory activities should be excluded from coverage of this
proposed rule.
Under the risk-based approach, an investment adviser would tailor
its program according to the specific risks presented by its various
activities. Factors that may indicate an activity or a customer is
lower risk include the jurisdiction of registration of legal person
customers, and whether the customer (where a legal person) is subject
to U.S. AML/CFT regulatory requirements.
(a) Mutual Funds
FinCEN is proposing to exempt from the proposed requirements
activities of investment advisers in advising mutual funds.\153\ FinCEN
believes that this exemption is appropriate because of the regulatory
and practical relationship between mutual funds and their investment
advisers. Specifically, although mutual funds are distinct legal
entities with distinct legal obligations, mutual funds typically do not
have their own independent operations. Rather, mutual funds are
entirely operated, and compliance with their legal obligations is
undertaken, by their service provider entities, foremost amongst them
their investment advisers. As a practical matter, we believe that any
AML/CFT requirement imposed on an RIA to a mutual fund is already
addressed by the existing AML/CFT requirements imposed on the mutual
fund itself.\154\ In particular, we expect that the investment adviser
to a mutual fund will have both (1) access to the exact same
information concerning the mutual fund or its investors that is
available to the mutual fund, in part in connection with its AML/CFT
obligations and (2) a significant role generally in the operations of
the mutual fund's regulatory responsibilities, including its AML/CFT
program. Consequently, we are proposing not to require investment
advisers to mutual funds to include those mutual funds within the
investment advisers' own AML/CFT programs, as we believe including a
mutual fund within its investment
[[Page 12124]]
adviser's AML/CFT program would be redundant. This exemption is
permissive and not mandatory; an investment adviser could decide to
include the mutual funds it advises in complying with any of the
investment adviser's proposed requirements.
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\153\ FinCEN's definition of a mutual fund under 1010.100(gg)
applies to an ETF as an ``open-end company'' (as the term is defined
in section 5 of the Investment Company Act).'' See supra n. 53.
\154\ FinCEN notes as well that the First Proposed Investment
Adviser Rule would have permitted mutual funds to be excluded from
the programs required of investment advisers covered by that
proposed rule. Commenters to the Second Proposed Investment Adviser
Rule, which would not have permitted such an exclusion, supported
instead the 2003 NPRM approach.
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Mutual funds are already subject to comprehensive AML/CFT
obligations under the BSA and are required to, among other things,
establish AML/CFT and customer identification programs, conduct CDD,
and report suspicious activity, among other obligations.\155\ FinCEN
believes that, currently, these requirements sufficiently mitigate the
money laundering, terrorist financing, and other illicit finance risks
associated with mutual funds and those funds' investors to justify this
exemption. FinCEN is requesting comment on whether to exempt mutual
funds from coverage in an adviser's AML/CFT program. FinCEN also
requests comment on whether there are other categories of entities
that, like mutual funds, could be reasonably exempted from an
investment adviser's AML/CFT program.
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\155\ See 31 CFR 1010.100(gg); 31 CFR part 1024.
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FinCEN is also proposing to exempt investment advisers from having
to comply with the reporting and recordkeeping requirements of part
1032, subparts C and D, for its mutual fund customers. FinCEN believes
that the proposed regulatory text is sufficiently clear that these
subparagraphs would not apply with respect to mutual fund customers,
because the internal policies, procedures, and controls to comply with
those requirements are closely linked to the AML/CFT program
requirement. FinCEN requests comment on whether additional regulatory
text in those subparts is needed to clarify this. FinCEN also requests
comment on whether the exemption should be dependent on the nature of
the relationship between the investment adviser and its mutual fund
customer, and whether the exemption would avoid duplication of existing
AML/CFT requirements. Lastly, FinCEN requests comment on whether
investment advisers to mutual funds should still be required to monitor
for and file SARs.
(b) Provision of Other Advisory Services
FinCEN understands that investment advisers provide a range of
services that could affect the nature of their AML/CFT programs. An
investment adviser may provide customers with advisory services that do
not include the management of customer assets or knowledge of
customers' investment decisions, such as pension consulting, securities
newsletters, research reports, or financial planning.
In the investment advisory industry, an adviser may also act as the
``primary adviser'' or ``subadviser.'' \156\ Generally, the primary
adviser contracts directly with the client, and a subadviser has
contractual privity with the primary adviser, though there is variation
across the sector with respect to the relationship and function between
primary advisers and subadvisers. Because subadvisory services are a
subcategory of advisory services, the proposed rule would apply to
investment advisers who provide subadvisory services.
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\156\ The Advisers Act does not distinguish between advisers and
subadvisers; all are ``investment advisers.'' See 76 FR 39646, 39680
(Jul. 6, 2011) at n. 504 and accompanying text.
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FinCEN requests comment on whether specific services provided by
investment advisers, such as advisory services that do not involve
management of client assets or subadvisory services, should be included
or excluded from coverage of this proposed rule. FinCEN also requests
comment on any alternative approaches for addressing compliance with
the proposed rule when advisers provide particular services, such as
allowing subadvisers to rely on the primary adviser or allowing the
primary adviser to delegate all AML/CFT obligations to the subadviser.
FinCEN further requests comment on whether there is an increased risk
for a subadviser when providing advisory services to a customer with a
primary adviser that is not an investment adviser as defined in the
proposed rule. FinCEN also requests comment on the extent a
subadviser's AML/CFT program would overlap with the primary adviser's
program and how duplication could be mitigated. Finally, FinCEN
requests comment on whether there are similar arrangements where an
investment adviser may be sub-contracted to provide services to another
investment adviser that should or should not be in the scope of an
investment adviser's AML/CFT program.
3. Dually Registered Investment Advisers and Advisers Affiliated With
or Subsidiaries of Entities Required To Establish AML/CFT Programs
According to a Treasury review of Form ADV filings, approximately
three percent of RIAs were dually registered with the SEC as investment
advisers and broker-dealers in securities, and approximately 20 percent
of RIAs may be affiliated with, or subsidiaries of, banks or broker-
dealers, which are required to establish AML/CFT programs. With respect
to an investment adviser that is dually registered as a broker-dealer
or is a bank (or is a bank subsidiary), FinCEN is not proposing to
require such an adviser to establish multiple or separate AML/CFT
programs so long as a comprehensive AML/CFT program covers all of the
entity's relevant business and activities that are subject to BSA
requirements. The program should be designed to address the different
money laundering, terrorist financing, or other illicit finance
activity risks posed by the different aspects of the entities'
businesses and, accordingly satisfy each of the risk-based AML/CFT
program requirements to which it is subject in its capacity as both an
investment adviser and broker-dealer or bank.\157\ Similarly, an
investment adviser affiliated with, or a subsidiary of, another entity
required to establish an AML/CFT program in another capacity would not
be required to implement multiple or separate programs as one single
program can be extended to all affiliated entities that are subject to
the BSA, so long as it is designed to identify and mitigate the
different money laundering, terrorist financing, and other illicit
finance activity risks posed by the different aspects of the entity's
business and satisfy each of the risk-based AML/CFT program and other
BSA requirements to which the organization is subject in all of its
regulated capacities, as for example an investment adviser and a bank
or insurance company.\158\
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\157\ 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 immediately be subject to certain
of those AML/CFT requirements, e.g., the CIP Rule, because the
proposed rule does not include CIP requirements at this time. FinCEN
intends to address CIP requirements in a subsequent joint rulemaking
with the SEC, after notice-and-comment.
\158\ 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. See 31 CFR 1010.100(t). 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/CFT compliance program that
would subject the insurance company to AML/CFT 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, to design an enterprise-wide AML/
CFT compliance program that would subject an affiliated or
controlled investment adviser to AML/CFT requirements that would not
be required by the proposed rule.
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[[Page 12125]]
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/CFT program that
includes all activities covered by FinCEN's regulations. However, these
entities would not be required to establish one comprehensive AML/CFT
program; they may instead establish multiple programs to satisfy their
AML/CFT obligations. What would be required, however, is that the
covered investment adviser and its affiliated financial institution(s)
identify and mitigate the risks arising across the organization or
organizations--for example, as they relate to one customer served by
both an affiliated bank and an investment adviser. If each of these
affiliates conducts due diligence on the same customer individually,
without assessing all of this information between both aspects of its
business, these businesses' understanding of their shared customer
would be incomplete, which could lead to a less effective understanding
of risk and detection of suspicious activity.
FinCEN is requesting comments on how dually registered investment
advisers and broker-dealers, or investment advisers affiliated with, or
a subsidiary of, a bank, broker-dealer, or other BSA-defined financial
institution, should apply their existing AML/CFT program to their
investment advisory activities. FinCEN also requests comment on whether
RIAs or ERAs that are affiliated with a bank or broker-dealer presently
apply enterprise-wide AML/CFT requirements, and whether certain AML/CFT
requirements are presently tailored for advisory activities.
4. Delegation of Duties
Investment advisers' services routinely involve other financial
institutions that have their own AML/CFT program requirements, such as
broker-dealers, banks, mutual funds, as well as other investment
advisers. FinCEN also recognizes that 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, transfer agents, and fund administrators. For instance,
many investment advisers that operate private funds delegate the
implementation and operation of certain aspects of their AML program to
a third party, most often the fund's administrator, which is an
independent third-party that provides valuation, administrative, and
other services to the fund and its investors.\159\
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\159\ FinCEN understands that some fund administrators are
nonbank subsidiaries of U.S. bank holding companies and, as such,
are subject to the global AML policies and procedures of these U.S.
institutions. FinCEN also understands that some investment advisers
delegate AML compliance to administrators located outside the United
States. These administrators are generally located in jurisdictions
that require regulated entities to have their own AML/CFT policies,
procedures, and controls. See, e.g., Managed Funds Association,
Letter to Financial Crimes Enforcement Network, Re: AML Program and
SAR Filing Requirements for Registered Investment Advisers (RIN:
1506-AB10), Docket Number FinCEN-2014-003 (Nov. 2, 2015).
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FinCEN recognizes that it is common in the advisory business to
delegate a range of compliance, administrative, and other activities to
third-party providers. In the proposed rule, similar to other BSA-
defined financial institutions, FinCEN would permit an investment
adviser to delegate contractually the implementation and operation of
aspects of its AML/CFT program. However, if an investment adviser
delegates the implementation and operation of any aspects of its AML/
CFT program to another financial institution, agent, fund
administrator, third-party service provider, or other entity, the
investment adviser would remain fully responsible and legally liable
for, and need to demonstrate, the program's compliance with AML/CFT
requirements and FinCEN's implementing regulations. The investment
adviser also would be required to ensure that FinCEN and the SEC are
able to obtain information and records relating to the AML/CFT program.
Because investment advisers operate through a variety of different
business models, each investment adviser may decide which aspects (if
any) of its AML/CFT program are appropriate to delegate. In certain
circumstances, for instance, an investment adviser may deem it
appropriate to delegate certain aspects of its suspicious activity
monitoring and reporting obligation to a third party, such as a
qualified custodian.
In addition to these financial institutions, there are other third-
party service providers that play an important role in advisory
activities, such as fund administrators. As FinCEN understands it, for
advisers who presently implement AML/CFT policies and procedures, it is
often current practice for those advisers to delegate the
administration of AML/CFT policies and procedures to their fund
administrator, along with non-AML/CFT activities such as processing
subscriptions, transfers, and redemptions administrators. Some fund
administrators are subsidiaries of U.S. financial or bank holding
companies that may have enterprise-wide AML/CFT programs, while those
in foreign jurisdictions may be subject to AML/CFT requirements under
local law.
However, as noted above, liability for noncompliance would remain
with the investment adviser. The investment adviser would still be
required to identify and document the procedures implemented to address
its vulnerability to money laundering, terrorist financing, and other
illicit finance activity, and then undertake reasonable steps to assess
whether the service provider carries out such procedures effectively.
For example, it would not be sufficient to simply obtain a
``certification'' from a service provider that the service provider has
a satisfactory AML/CFT program. Similarly, if an investment adviser
delegates the responsibility for suspicious activity reporting 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.
FinCEN requests comment on the scope of information fund
administrators currently collect that would support implementation of
the proposed rule, and on the practical effect of permitting an
investment adviser to delegate some or all of the requirements in the
proposed rule. FinCEN also requests comment on the quality of AML/CFT
programs implemented by fund administrators whose operations are
primarily conducted outside of the United States, the extent to which
these fund administrators are able to collect and provide information
on the natural person and legal entity investors in offshore pooled
investment vehicles when that information is requested by a U.S.
investment adviser, the ability of the U.S. investment adviser to
effectively monitor the implementation of proposed requirements by fund
administrators, and the quality of suspicious activity or suspicious
transaction reports submitted by those fund administrators.
5. AML/CFT Program Approval
Section 1032.210(a)(2) of the proposed rule would require that each
investment adviser's AML/CFT 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 ensure that the
[[Page 12126]]
requirement to have an AML/CFT program receives the appropriate level
of attention and is intended to be sufficiently flexible to permit an
investment adviser to comply with this requirement based on its
particular organizational structure. The proposed rule would require an
investment adviser's written program to be made available for
inspection by FinCEN or the SEC.
6. The Required Elements of an Anti-Money Laundering/Countering the
Financing of Terrorism Program
(a) Required Policies, Procedures, and Internal Controls
Section 1032.210(b)(1) would require an investment adviser to
establish and implement policies, procedures, and internal controls
reasonably designed to prevent money laundering, terrorist financing,
and other illicit finance activities. As noted in section II, these
risks may include not only activities tied to money laundering, such as
fraud or corruption, but also any affiliation or relationship with
either persons designated by the United States or other jurisdictions
with which the United States regularly coordinates sanctions actions,
or foreign state-sponsored investment activity in critical or emerging
technologies. FinCEN recognizes that some types of customers or
customer activities would pose greater risks for money laundering,
terrorist financing, or other illicit finance activity than others.
Generally, under the proposed rule, an investment adviser would be
required to review, among other things, the types of advisory services
it provides and the nature of the customers it advises to identify the
investment adviser's vulnerabilities to money laundering, terrorist
financing, and other illicit finance activities. It would also need to
review investment products offered, distribution channels,
intermediaries that it may operate through, and geographic locations of
customers and business activities. Accordingly, an investment adviser's
assessment of the risks presented by the different types of advisory
services it provides to such customers would need to, among other
factors, consider the types of accounts offered (e.g., managed
accounts), the types of customers opening such accounts, the geographic
location of such customers, and the sources of wealth for customer
assets. FinCEN expects that investment advisers would generally be able
to adapt existing policies and procedures to meet this
requirement.\160\ FinCEN requests comment on whether it should require
an investment adviser to include all the advisory services it provides
in its AML/CFT program.
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\160\ See discussion in section II.B, infra, for a discussion of
existing Advisers Act recordkeeping and reporting obligations that
may enable investment advisers to adapt existing policies,
procedures, and internal controls. In addition, as noted above,
according to one industry survey, as of 2016, 40 percent of
participants had adopted AML programs similar to the AML program
requirements proposed in the Second Proposed Investment Adviser
Rule.
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The discussion below focuses on how an investment adviser's AML/CFT
program may address the money laundering, terrorist financing, or other
illicit finance risks that may be presented by certain specific types
of advisory customers, as well as how an adviser's program may address
the risks presented by certain specific advisory services provided to
those customers. In addition, this section describes FinCEN's
expectations under a risk-based approach regarding advisory services to
wrap fee programs. FinCEN requests comment on whether closed-end
registered funds, wrap fee programs, or other types of accounts advised
by investment advisers should be, on a risk-basis, reasonably exempted
from an investment adviser's AML/CFT program.
Registered Closed-End Funds. Based on one available estimate, at
the end of 2022, there were approximately 440 registered closed-end
funds that had approximately $250 billion in AUM.\161\ Unlike open-end
funds, closed-end funds do not have an existing AML/CFT program or SAR
requirement. Registered closed-end funds, however, are subject to
comprehensive SEC regulation and oversight and typically trade in the
secondary market through broker-dealers who have AML/CFT obligations
and where there are additional required disclosures and greater
transparency.
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\161\ See 2023 Investment Company Factbook at p.2,17, supra n.
55. Unlike traditional mutual funds (or ``open-end funds''), closed-
end funds are not required to buy back shares from shareholders.
Closed-end funds sell their shares in a public offering. After that,
their shares trade on national securities exchanges at market
prices. The market price may be greater or less than the market
value of the fund's underlying investments.
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For these reasons, although FinCEN is not proposing to exempt
closed-end funds from the AML/CFT or SAR requirements in the proposed
rule, FinCEN would expect, absent other indicators of high-risk
activity, investment advisers could treat closed-end funds as lower-
risk for purposes of their AML/CFT programs. FinCEN requests comments
on the money laundering, terrorist financing, and other illicit finance
risks faced by closed-end funds, and how entities with existing AML/CFT
requirements, such as banks and broker-dealers, apply those
requirements to activity involving closed-end funds.
Private Funds. As described above, the money laundering, terrorist
financing, or illicit finance activity risk for private funds may vary
with the individual fund's investment strategy, targeted investors, and
other characteristics. Some private funds have traditionally been seen
as less attractive to certain illicit actors. For instance, due to
their long-term investment focus and illiquid nature, certain private
equity funds may be less likely to be used by money launderers,
terrorist financiers, and others engaging in illicit finance.\162\
Other relevant characteristics of private funds include minimum
subscription amounts, restrictions on the type of investors they can
accept, and the fact that most funds prohibit the receipt of paper
currency. However, those factors may not be a barrier to more
sophisticated fraudsters or corrupt officials, among others, that have
already placed their funds into a foreign bank and are seeking long-
term returns outside of their home country.
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\162\ For instance, in the Proposed Unregistered Investment
Companies Rule, FinCEN proposed to exclude from the scope of its
proposed AML requirements those funds that did not offer their
investors the right to redeem any portion of their ownership
interests within two years after those interests were acquired. See
68 FR at 60619.
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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 noted above, 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 presented by their customers,
including any funds they advise. In assessing the potential risk of a
private fund under the proposed rule, investment advisers generally
should gather pertinent facts about the structure or ownership of the
fund, including both the extent to which they are provided with
relevant information about the investors in that private fund, who may
or may not themselves also be customers of the investment adviser, and
the nature of such investor-related information that they receive.
[[Page 12127]]
Under the proposed rule, where an investment adviser attempted to
and was unable to obtain identifying information about the investors in
a private fund, the private fund may pose a higher risk for money
laundering, terrorist financing, or other illicit finance activity.
When a private fund's potential vulnerability to money laundering,
terrorist financing, or other illicit finance activity is high, the
adviser's procedures would need to reasonably address these higher
risks so that the adviser is able 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 BSA
(including to obtain sufficient information to monitor and report
suspicious activity). FinCEN requests comment on what information is
currently available to advisers to private funds regarding their
investors that could help advisers comply with the proposed AML/CFT
requirements. FinCEN also requests comment on whether a subadviser to a
private fund or other unregistered pooled investment vehicle should be
required to establish the same policies, procedures, and internal
controls as when the primary adviser is the investment adviser, or
should be required to mitigate the risks of money laundering, terrorist
financing, or other illicit activity to the investing pooled investment
vehicle's investors, sponsoring entity, and/or intermediaries.
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. FinCEN requests comment on factors related to the activities,
investors, or structure of private funds or other unregistered pooled
investment vehicles that could be higher- or lower-risk. FinCEN also
requests comment on how the proposed rule should apply to advisers who
manage private funds that receive investments from in-funds or who have
funds-of-funds who are investors.
Wrap Fee Programs. In a wrap fee program, investment advisory and
brokerage services are provided together as a single product.\163\ For
the purposes of this discussion, FinCEN will focus on wrap fee
arrangements where an investment adviser is solely acting as a
portfolio manager and generally managing the customer account to a
selected model. In these programs, even if both advisers or broker-
dealers are providing services, there is a single ``relationship''
entity that is responsible for the relationship with the customer,
managing the account overall, and selecting the account strategy. That
program sponsor has the primary relationship with the customer, which
means that the program sponsor is typically best positioned to
recognize illicit financial activity in the program.
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\163\ A ``wrap fee program'' for purposes of the proposed rule
is a program under which investment advisory and brokerage execution
services (as well as administrative expenses and other fees and
expenses) are provided for a single ``wrapped'' (i.e., bundled) fee.
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While FinCEN recognizes the characteristics described above
regarding the most common structure of wrap fee programs, it is not
proposing to exempt wrap fee programs from coverage of the proposed
rule. Depending on the structure of the wrap fee program, the
investment adviser may be best positioned to spot illicit finance
activity (if, for example, it is the program sponsor). Moreover, even a
non-sponsoring investment adviser may have additional insights into the
activity of the wrap fee program. FinCEN requests comments on how the
requirements of the proposed rule can be applied to advisers
participating in a wrap fee program, to include when an adviser acting
as portfolio manager is either affiliated or not affiliated with the
sponsoring entity of the program.
(b) Provide for Independent Testing for Compliance To Be Conducted by
Company Personnel or by a Qualified Outside Party
Section 1032.210(b)(2) would require that an investment adviser
provide for independent testing of the AML/CFT program by the adviser's
personnel or a qualified outside party. The purpose of this provision
is to ensure that an investment adviser's AML/CFT program complies with
the requirements of Sec. 1032.210 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.\164\ The employees would have to be
knowledgeable regarding AML/CFT requirements and qualified to conduct
independent testing. The frequency of the independent testing would
depend upon the money laundering, terrorist financing, and other
illicit finance risks of the adviser and the adviser's overall risk
management strategy. For instance, an adviser could conduct independent
testing over periodic intervals (e.g., every 12 to 18 months) or when
there are significant changes in the adviser's risk profile (with
respect to money laundering, terrorist financing, or other illicit
finance risks), systems, compliance staff, or processes. More frequent
independent testing may be appropriate when errors or deficiencies in
some aspect of the AML/CFT compliance program have been identified or
to verify or validate mitigating or remedial actions. Any
recommendations resulting from such testing would need to be promptly
implemented or submitted to senior management for consideration.
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\164\ As noted in this NPRM, some investment advisers may
implement enterprise-wide AML/CFT programs that are evaluated at the
holding company level. It would not be consistent with the
requirements of this proposed regulation for an employee at an
affiliated financial institution, including the holding company, to
be responsible for testing the adviser's AML/CFT program, or carry
out such testing, if the affiliate's employee is responsible for
administering the adviser's AML/CFT program.
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(c) Designate a Person or Persons Responsible for Implementing and
Monitoring the Operations and Internal Controls of the Program
Section 1032.210(b)(3) would require that an investment adviser
designate a person or persons to be responsible for implementing and
monitoring the operations and internal controls of the AML/CFT program.
Under the proposed rule, an investment adviser may designate a single
person or persons (including in a committee) to be responsible for
compliance. The person or persons should be knowledgeable and competent
regarding AML/CFT requirements, the adviser's relevant policies,
procedures, and controls, as well as the adviser's money laundering,
terrorist financing, and other illicit finance risk. The person or
persons should have full responsibility and authority to develop and
implement appropriate policies, procedures, and internal controls
reasonably designed to prevent the investment adviser from being used
for those risks. Whether the compliance officer is dedicated full time
to AML/CFT compliance would depend on the size and type of advisory
services the adviser provides and the customers it serves. A person
designated as a compliance officer should be an officer
[[Page 12128]]
of the investment adviser (or individual of similar authority within
the particular corporate structure of the investment adviser) and
someone who has established channels of communication with senior
management demonstrating sufficient independence and access to
resources to implement a risk-based and reasonably designed AML/CFT
program.\165\
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\165\ In particular, RIAs who are subject to the SEC's
Compliance Rule (17 CFR 275.206(4)-7), could designate their chief
compliance officer under that rule to be responsible for this
provision of the proposed rule. The proposed rule does not, however,
require that an investment adviser designate the same person.
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(d) Provide Ongoing Training for Appropriate Persons
Section 1032.210(b)(4) would require that an investment adviser
provide for ongoing training of appropriate persons. Employee training
is an integral part of any AML/CFT program. To carry out their
responsibilities effectively, employees of an investment adviser (and
of any agent or third-party service provider that is charged with
administering any portion of the investment adviser's AML/CFT program)
would have to be trained in AML/CFT requirements relevant to their
functions and to recognize possible signs of money laundering,
terrorist financing, and other illicit finance activity that could
arise in the course of their duties. Such training may be conducted
through, among other things, outside or in-house seminars, and may
include computer-based or virtual 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 would bring them in contact with AML/CFT
requirements or possible money laundering, terrorist financing, or
other illicit finance activity. Consequently, under the proposed rule,
the training program should provide a general awareness of overall AML/
CFT requirements and money laundering, terrorist financing, and other
illicit finance risks, as well as more job-specific guidance tailored
to particular employees' roles and functions with respect to the
entities' particular AML/CFT program.\166\ For those employees whose
duties bring them in contact with AML/CFT requirements or possible
money laundering, terrorist financing, or other illicit finance risks,
the requisite training would have to occur when the employee assumes
those duties. Moreover, these employees should receive periodic updates
and refreshers regarding the AML/CFT program.\167\
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\166\ See e.g., DWS Investment Management Americas Inc.,
Investment Company Act Rel. No. 6431, ] 28 (Sept. 25, 2023) (noting
DWS' failure to conduct AML training that was specific to the DWS
Mutual Funds or the risks applicable to mutual funds for those
employees with mutual fund responsibilities).
\167\ The frequency of these periodic updates and refreshers
would depend upon the money laundering, terrorist financing, and
other illicit finance risks of the adviser and the adviser's overall
risk management strategy.
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(e) Ongoing Customer Due Diligence (CDD)
Section 1032.210(b)(5) would require that an investment adviser
implement appropriate risk-based procedures for conducting ongoing CDD
that includes (i) understanding the nature and purpose of customer
relationships for the purpose of developing a customer risk profile;
and (ii) conducting ongoing monitoring to identify and report
suspicious transactions and, on a risk basis, to maintain and update
customer information.
These obligations were added to the AML/CFT program requirements
for financial institutions in May 2016, when FinCEN issued the CDD
Rule.\168\ The CDD Rule clarified and strengthened CDD requirements for
covered financial institutions (banks, mutual funds, brokers or dealers
in securities, futures commission merchants, and introducing brokers in
commodities) and added a new requirement for these covered financial
institutions to identify and verify the identity of the natural persons
who own or control (known as beneficial owners of) legal entity
customers when those customers open accounts.
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\168\ FinCEN, Customer Due Diligence Requirements for Financial
Institutions, final rule, 81 FR 29398 (May 11, 2016).
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The CDD Rule identifies the four core elements of CDD: (1)
identifying and verifying the identity of customers; (2) identifying
and verifying the identity of the beneficial owners of legal entity
customers opening accounts; (3) understanding the nature and purpose of
customer relationships; and (4) conducting ongoing monitoring.\169\
FinCEN requests comment on the types of information investment advisers
regularly receive from their customers, and how investment advisors
would exchange information with other financial institutions, that
could be used to understand the nature and purpose of the customer
relationship and identify and monitor suspicious transactions.
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\169\ Id. at 29398.
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Requiring investment advisers to perform effective CDD so that they
understand who their customers are and what type of transactions they
conduct is a critical aspect of combating all forms of illicit finance
activity, from terrorist financing and sanctions evasion to more
traditional financial crimes, including money laundering, fraud, and
tax evasion. These measures would also enable investment advisers to
identify and report suspicious transactions by filing SARs in the
manner that best serves the purposes of the BSA. For investment
advisers covered by the proposed rule, FinCEN expects to address the
first requirement of customer identification and verification in a
future joint rulemaking with the SEC, as noted above, while the third
and fourth elements of the CDD Rule are being incorporated into these
AML/CFT Program requirements through proposed Sec. 1032.210(b)(5).
FinCEN will take the first steps towards incorporating the second
element by including investment advisers in the definition of ``covered
financial institution'' under 31 CFR 1010.605(e)(1), discussed at
further length below. However, the requirement to identify and verify
the beneficial owners of legal entity customer accounts is predicated
on the existence of a CIP requirement, which, as just stated, FinCEN
anticipates addressing in the future joint rulemaking with the SEC.
The CDD Rule is affected by the Corporate Transparency Act (CTA),
passed as part of the AML Act. The CTA requires certain types of
domestic and foreign entities, called ``reporting companies,'' to
submit specified beneficial ownership information (BOI) to FinCEN.\170\
In certain circumstances, FinCEN is authorized to share this BOI with
government agencies, financial institutions, and financial regulators,
subject to appropriate protocols.\171\
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\170\ See generally 31 U.S.C. 5336(b), (c).
\171\ See 31 U.S.C. 5336(c)(2).
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FinCEN is issuing three key rules pursuant to the CTA. The first
rule--the BOI reporting rule--requires certain corporations, limited
liability companies, and other entities created in or registered to do
business in the United States to report information about their
beneficial owners.\172\ This rule was promulgated on September 30,
2022.\173\ The second establishes rules for who may access BOI for what
purposes, and what safeguards will be required to ensure that the
information is secured and protected.\174\ This rule was promulgated on
December 21, 2023
[[Page 12129]]
and goes into effect on February 20, 2024.\175\
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\172\ See 31 CFR 1010.380.
\173\ FinCEN, Beneficial Ownership Information Reporting
Requirements, final rule, 87 FR 59498 (Sep. 30, 2022).
\174\ See 31 CFR 1010.955.
\175\ .FinCEN, Beneficial Ownership Information Access and
Safeguards, final rule, 88 FR 88732 (Dec. 21, 2023).
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The CTA also requires FinCEN to revise the CDD Rule no later than
January 1, 2025.\176\ FinCEN is required to rescind the existing
specific beneficial ownership identification and verification
requirements of 31 CFR 1010.230(b)-(j), while retaining the general
requirement for financial institutions to identify and verify the
beneficial owners of legal entity customers under 31 CFR
1010.230(a).\177\ FinCEN expects to undertake a third rulemaking to
revise the CDD Rule and anticipates that, because of the changes
required by the AML Act, such a rulemaking could have a significant
impact on financial institutions' CDD obligations.
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\176\ See AML Act section 6403(d)(1) (``Not later than 1 year
after the effective date of the regulations promulgated under
section 5336(b)(4) of title 31, United States Code, as added by
subsection (a) of this section, the Secretary of the Treasury shall
revise the final rule entitled `Customer Due Diligence Requirements
for Financial Institutions' . . . .''). The effective date of the
relevant final rule is January 1, 2024.
\177\ See AML Act section 6403(d)(2) (``[T]he Secretary of the
Treasury shall rescind paragraphs (b) through (j) of section
1010.230 of title 31 . . . upon the effective date of the revised
rule promulgated under this subsection. Nothing in this section may
be construed to authorize the Secretary of the Treasury to repeal
the requirement that financial institutions identify and verify
beneficial owners of legal entity customers under section
1010.230(a).'').
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In light of these anticipated forthcoming changes to the CDD Rule
and the statutory deadline of January 1, 2025, to complete them, FinCEN
assessed that investment advisers should not be required to apply the
current CDD requirements to identify and verify the beneficial owners
of legal entity customer accounts during the period between this
proposed rulemaking and the effective date of the revised CDD Rule.
Therefore, FinCEN has not included requirements to identify and verify
the beneficial owners of legal entity customer accounts in this
proposed rule. However, FinCEN invites comment regarding whether it
should apply such requirements once a joint rulemaking addressing CIP
requirements is finalized, notwithstanding the forthcoming CDD Rule.
Requirement to Identify and Verify Customers. Existing requirements
for other BSA-defined financial institutions require that the relevant
financial institution's CIP include risk-based procedures to verify the
identity of each customer, to the extent reasonable and practicable.
The elements of such program must include identifying the customer,
verifying the customer's identity (through documents or non-documentary
methods, or a combination thereof), procedures for circumstances where
the institution cannot form a reasonable belief that it knows the true
identity of the individual, and determining whether the names of
customers appear on any government-provided list of known terrorists or
terrorist organizations. As noted above, Treasury expects to address
CIP requirements through a future joint rulemaking with the SEC, as
required by section 326 of the USA PATRIOT Act.\178\
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\178\ See 31 U.S.C. 5318(l).
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Understand the Nature and Purpose of Customer Relationships to
Develop Customer Risk Profiles. As is the case for banks, broker-
dealers, and mutual funds, the term ``customer risk profile'' for
covered investment advisers refers to information gathered--typically
at the time of account opening or, in the case of a covered investment
adviser, at the onset of an advisory relationship--about a customer to
develop the baseline against which customer activity is assessed for
suspicious activity reporting.
Under the proposed rule, investment advisers are obligated to
report suspicious activity by filing SARs on transactions that, among
other things, have no business or apparent lawful purpose or are not
the sort in which the particular customers would normally be expected
to engage. Fulfilling this proposed requirement would necessitate that
an investment adviser understands the nature and purpose of the
customer relationship, which informs the baseline against which
aberrant, suspicious transactions are identified. In some
circumstances, an understanding of the nature and purpose of a customer
relationship can also be developed by inherent or self-evident
information about the product or customer type, such as the type of
customer or the service or product offered, or other basic information
about the customer, and such information may be sufficient to
understand the nature and purpose of the relationship. This may include
the customer's explanation about its initial decision to seek advisory
services from the adviser and may be reflected in the particular type
of advisory service the customer seeks, as well as information already
collected by the investment adviser, such as net worth, domicile,
citizenship, or principal occupation or business.
For investment advisers, the risk associated with a particular type
of customer may vary significantly. For instance, key risk factors for
natural person customers may include the source of funds, the
jurisdiction in which they reside, their country(ies) of citizenship,
and their status as a PEP,\179\ among other things. For legal entity
customers, an investment adviser may consider the type of entity, the
jurisdiction in which it is domiciled and located, and the statutory
and regulatory regime of that jurisdiction for company formation and
other financial transparency requirements, if relevant. The investment
adviser's historical experience with the individual or entity and the
references of other financial institutions may also be relevant
factors.
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\179\ See generally Joint Statement on Bank Secrecy Act Due
Diligence Requirements for Customers Who May Be Considered
Politically Exposed Persons, (Aug. 21, 2020), https://www.fincen.gov/sites/default/files/shared/PEP%20Interagency%20Statement_FINAL%20508.pdf.
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Regarding the legal entity customers of an adviser, some may be
financial intermediaries or third parties that are BSA-defined
financial institutions and have their own AML/CFT requirements.
Consequently, the investment adviser may not always have a direct
relationship with the investors in its legal entity customers. Those
investors may be introduced to the adviser by other entities who or may
or may not have their own AML/CFT obligations (such as a broker-dealer,
other investment adviser, or other intermediary). For these
intermediary entities, and even though investment advisers would not be
required to categorically collect beneficial ownership information on
legal entity customers, investment advisers should collect sufficient
information such that they are able to detect and report suspicious
activity associated with intermediated accounts, including activity
related to underlying clients.\180\ FinCEN expects that non-
intermediary legal entity customers that are not BSA-defined financial
institutions with their own AML/CFT requirements would be subject to a
different assessment than intermediary customers that are BSA-defined
financial institutions for understanding the nature and purpose of the
customer relationship. The requirement to assess customer risk laid out
in this proposed rule must be understood in this context.
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\180\ See FinCEN, Customer Due Diligence Requirements for
Financial Institutions, notice of proposed rulemaking, 79 FR 45141,
45161 (Aug. 4, 2014).
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For understanding the nature and purpose of customers who are
private funds, FinCEN notes that investment advisers can (1) create and
administer a private fund or (2) provide advice to a
[[Page 12130]]
private fund that is created and administered by a third party or an
intermediary. While the particular role played by the investment
adviser will affect the type of information the adviser can collect
about the investors in such a fund, the adviser should collect
sufficient information to develop a customer baseline for suspicious
activity reporting regarding the private fund. FinCEN invites comments
on other types of information, other than beneficial ownership
information, that could be collected to understand the nature and
purpose of a customer relationship with a private fund.
Ongoing Monitoring to Identify Suspicious Transactions and Update
Customer Information. This element of CDD would oblige investment
advisers to perform ongoing monitoring drawing on customer information,
as well as to file SARs in a timely manner in accordance with their
reporting obligations.\181\ As proposed, the obligation to update
customer information would generally only be triggered when the
investment adviser became aware of information as part of its normal
monitoring relevant to assessing the potential risk posed by a
customer; it is not intended to impose a categorical requirement to
update customer information on a regularly occurring, pre-determined
basis. Similar to the CDD obligations for mutual funds,\182\ under the
proposed Sec. 1032.210(b)(5)(ii), investment advisers would be
required to implement appropriate risk-based procedures to conduct
ongoing monitoring to identify and report suspicious transactions and,
on a risk basis, to maintain and update customer information.
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\181\ FinCEN's proposed SAR filing obligations for investment
advisers are discussed below.
\182\ 31 CFR 1024.210(b)(5)(ii); see also FinCEN, 81 FR at
29424.
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Ongoing monitoring may be accomplished in several ways. Customer
information may be integrated into the financial institution's
transaction monitoring system and may be used after a potentially
suspicious transaction has been identified, as one means of determining
whether the identified activity is suspicious. An investment adviser
may also utilize the information sharing provisions under section
314(b) of the USA PATRIOT Act to request relevant information from
other financial institutions that may hold relevant information, such
as the qualified custodians of customer funds.
Regarding legal entity customers, FinCEN assesses that in some
circumstances, on a risk-basis, an investment adviser would not need
information relating to investors in those legal entity customers to
comply with the requirements of the ongoing monitoring obligation.
However, in other circumstances, investment advisers may need to
request information regarding investors in their legal entity
customers. As FinCEN noted in the CDD Rule, the ongoing monitoring
obligation is intended to apply to ``all transactions by, at, or
through the financial institution,'' \183\ and not just those that are
direct customers of the financial institution. Given that risks posed
by each customer differ, FinCEN finds that the level of risk posed by a
customer relationship should be a factor influencing the decision to
request information regarding underlying customers, and if the legal
entity customer does not provide such information, how the investment
adviser should adjust the risk profile of that legal entity customer.
FinCEN is requesting comment on several aspects of the proposed
requirement to apply CDD obligations described above.
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\183\ Id.
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Compliance Date. Section 1032.210(c) states the effective date by
which an investment adviser would be required to comply with this
section. Specifically, under this proposed rule, an investment adviser
would be required to develop and implement an AML/CFT program that
complies with the requirements of this section on or before twelve
months from the effective date of the regulation.
7. Duty To Establish, Maintain, and Enforce an AML/CFT Program by
Persons in the United States
FinCEN recognizes that many investment advisers are located outside
the United States or contract certain of their operations outside the
United States. As FinCEN seeks to harmonize this AML/CFT framework in a
manner consistent with the SEC's existing framework for investment
advisers, the proposed rule follows the scope of the SEC's registration
requirements for RIAs and Form ADV filing requirements for ERAs.
Consistent with longstanding SEC practice and guidance interpreting
investment adviser registration requirements under the Advisers
Act,\184\ unless subject to an exemption, investment advisers located
abroad generally must register with the SEC if they ``make use of the
mails or any means or instrumentality of interstate commerce in
connection with [their] business as an investment adviser.'' \185\ The
BSA permits FinCEN to regulate financial institutions located outside
the United States in such circumstances, and FinCEN has previously
similarly defined certain financial institutions on the basis of SEC
registration, regardless of their physical location.\186\ In line with
these requirements and SEC guidance, the proposed rule's requirements
would therefore apply on the same basis to RIAs and ERAs located
outside the United States.
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\184\ 15 U.S.C. 80b-3(a), (d); see also 76 FR 39646, 39668-72
(Jul. 6, 2011).
\185\ 15 U.S.C. 80b-3(a).
\186\ See, e.g., 31 CFR 1023.100(b).
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FinCEN requests comment on any challenges for investment advisers
in following the scope of the SEC's registration and filing
requirements for advisers located outside the United States and any
potential conflicts with domestic and foreign law. FinCEN also requests
comment on whether requiring such non-U.S. advisers to file reports of
suspicious activity with FinCEN is consistent with how the applicable
SAR rules are applied to broker-dealers or other BSA-defined financial
institutions or poses any concerns under foreign law, including foreign
privacy laws.
For investment advisers covered by the proposed rule, it may be
appropriate to outsource certain aspects of compliance with the
proposed rule outside the United States. But section 6101(b)(2)(C) of
the AML Act, codified at 31 U.S.C. 5318(h)(5), provides that the duty
to establish, maintain, and enforce a financial institution's AML/CFT
program shall remain the responsibility of, and be performed by,
persons in the United States who are accessible to, and subject to
oversight and supervision by, the Secretary of the Treasury and the
appropriate Federal functional regulator.\187\ Proposed Sec.
1032.210(d) would incorporate this statutory requirement with respect
to the AML/CFT program by restating that the duty to establish,
maintain, and enforce the AML/CFT program must remain the
responsibility of, and be performed by, persons in the United States
who are accessible to, and subject to oversight and supervision by,
FinCEN and the financial institution's appropriate Federal functional
regulator (i.e., for covered investment advisers, the SEC).\188\
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\187\ 31 U.S.C. 5318(h)(5).
\188\ Not all financial institutions that are required to have
AML/CFT programs under the BSA have Federal functional regulators
pursuant to 15 U.S.C. 6809.
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FinCEN recognizes RIAs and ERAs (as well as other financial
institutions) may currently have AML/CFT staff and operations outside
of the United States to improve cost efficiencies, to enhance
coordination particularly with respect to cross-border operations, or
for other
[[Page 12131]]
reasons. FinCEN requests comment on a variety of potential questions or
challenges that may arise for financial institutions as they address
this requirement, including questions about the scope of the
requirement and the obligations of persons that are covered. FinCEN
intends to consider whether additional interpretive language would be
appropriate in a final rule.
F. Reports of Suspicious Transactions
Under the BSA, FinCEN (through a delegation from the Secretary) is
authorized to require financial institutions to report suspicious
transactions relevant to a possible violation of law or
regulation.\189\ FinCEN has issued regulations under this authority
requiring banks, casinos, money services businesses, broker-dealers in
securities, mutual funds, insurance companies, futures commission
merchants, loan or finance companies, futures commission merchants, and
introducing brokers in commodities to report suspicious activity by
submitting SARs to FinCEN.\190\ Suspicious activity reporting by these
and other types of financial institutions provide information that is
highly useful to law enforcement and regulatory investigations and
proceedings, as well as in the conduct of intelligence activities to
protect against international terrorism.\191\
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\189\ 31 U.S.C. 5318(g)(1). 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.''
\190\ See 31 CFR 1020.320, 1021.320, 1022.320, 1023.320,
1024.320, 1025.320, 1026.320, and 1029.320.
\191\ See 31 U.S.C. 5311. See also FinCEN, Year in Review for FY
2022 (Apr. 21, 2023) (providing additional information on the value
of BSA data), https://www.fincen.gov/sites/default/files/shared/FinCEN_Infographic_Public_2023_April_21_FINAL.pdf.
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Accordingly, this proposed rule would add a new section to FinCEN
regulations, proposed Sec. 1032.320, that would similarly require
investment advisers to file SARs for any suspicious transaction
relevant to a possible violation of law or regulation. FinCEN would
expect that requiring investment advisers to report suspicious activity
would similarly provide highly useful information for investigations
and proceedings involving domestic and international money laundering,
terrorist financing, and other illicit finance activity, as well as for
intelligence purposes. Requiring investment advisers to report
suspicious activity would also narrow the regulatory gap that may be
exploited by money launderers, terrorist financiers, or other illicit
actors seeking access to the U.S. financial system through financial
institutions not required to report suspicious transactions. The
proposed requirement is also generally consistent with the existing SAR
filing requirements for other financial institutions under existing
regulations. As explained above, the proposed rule would not require
investment advisers to file SARs with respect to any mutual fund that
it advises.
1. Reports by Investment Advisers of Suspicious Transactions
Proposed Sec. 1032.320(a) sets forth the criteria for which an
investment adviser would be obligated 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. Filing a report of a suspicious transaction would not relieve
an investment adviser from the responsibility of complying with any
other reporting requirement imposed by the SEC.
Proposed Sec. 1032.320(a)(1) contains the general statement of the
obligation to file reports of suspicious transactions. The obligation
would extend 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 those for other financial
institutions, Sec. 1032.320(a)(1) incorporates language from the SAR
rules applicable to other financial institutions, such as banks,
broker-dealers in securities, mutual funds, casinos, and money services
businesses.
Proposed Sec. 1032.320(a)(2) would require the reporting of
suspicious activity that involves or aggregates at least $5,000 in
funds or other assets. The $5,000 threshold 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.\192\ Furthermore, proposed Sec.
1032.320(a)(1) would permit 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 would
encourage the voluntary reporting of suspicious transactions, such as
those below the $5,000 threshold of the proposed rule in Sec.
1032.320(a)(2). Such voluntary reporting would be subject to the same
protection from liability as mandatory reporting pursuant to 31 U.S.C.
5318(g)(3).
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\192\ See 31 CFR 1020.320(a), 1021.320(a), 1024.320(a),
1023.320(a), 1026.320(a), and 1029.320(a) (requiring mutual funds,
broker-dealers in securities, banks, casinos, futures commission
merchants and introducing brokers, and loan or finance companies to
report suspicious transactions if they involve in the aggregate at
least $5,000).
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Section 1032.320(a)(2)(i) through (iv) specify that an investment
adviser would be required to report a transaction if it knows,
suspects, or has reason to suspect that the transaction (or a pattern
of transactions 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 as a 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 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.
The proposed rule would also require, including through the
obligation to conduct ongoing CDD, at proposed Sec. 1032.210(b)(5),
that an investment adviser evaluate customer activity and relationships
for money laundering, terrorist financing, and other illicit finance
risks and design a suspicious transaction monitoring program that is
appropriate for the particular investment adviser in light of such
risks. For some investment advisers, such a program may include
information that may be held by a qualified custodian receiving and
sending customer funds. Some of the types of suspicious activity an
investment adviser may identify and report are transactions designed to
hide the source or destination of funds and fraudulent activity. Other
suspicious activity tied to private funds, particularly venture capital
funds, could include an investor in such a fund requesting access to
detailed non-public technical information about a portfolio company
that is inconsistent with a professed focus on economic return. A money
launderer also could engage in placement and layering by funding a
managed account or investing in a private fund by using multiple wire
transfers from different accounts maintained at different financial
institutions or requesting that a transaction be processed in a manner
to
[[Page 12132]]
avoid funds being transmitted through certain jurisdictions.
Suspicious activity could include other unusual wire activity that
does not correlate with a customer's stated investment objectives;
transferring funds or other assets involving the accounts of third
parties with no plausible relationship to the customer, transfers of
funds or assets involving suspicious counterparties--such as those
subject to adverse media, exhibiting shell company characteristics, or
located in jurisdictions with which the customer has no apparent nexus;
the customer behaving in a manner that suggests that the customer is
acting as a ``proxy'' to manage the assets of a third party; or an
unusual withdrawal request by a customer with ties to activity or
individuals subject to U.S sanctions following or shortly prior to news
of a potential sanctions listing. Additionally, suspicious activity
could include potential fraud and manipulation of customer funds
directed by the investment adviser. These typologies can consist of
insider trading, market manipulation, or an unusual wire transfer
request by an investment adviser from a private fund's account held for
the fund's benefit at a qualified custodian.
FinCEN notes, however, that the techniques of money laundering,
terrorist financing, and other illicit finance activity are continually
evolving, and there is no way to provide a definitive list of
suspicious transactions. A determination to file a SAR should be based
on all the facts and circumstances relating to the transaction and the
customer in question. As discussed above, FinCEN believes that
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 to
report suspicious activity.
Section 1032.320(a)(3) would provide that more than one investment
adviser may have an obligation to report the same suspicious
transaction and that other financial institutions may have separate
obligations to report suspicious activity with respect to the same
transaction pursuant to other provisions in the BSA. However, where
more than one investment adviser, or another financial institution with
a separate suspicious activity reporting obligation,\193\ is involved
in the same transaction, only one report jointly filed on behalf of all
involved financial institutions would be required. 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. Furthermore, as
discussed above, some investment advisers are dually registered or
affiliated with another financial institution. It would be permissible
for either the investment adviser or the other financial institution to
file a single joint report provided that the joint report contained all
relevant facts and that each institution maintained a copy of the
report and any supporting documentation. The same approach would apply
when more than two financial institutions are involved. FinCEN requests
comment on whether there are existing requirements under the Advisers
Act or other laws or regulations that could assist investment advisers
in complying with the proposed SAR requirements. FinCEN also requests
comment on what guidance would be useful in identifying activity that
may require the filing of a SAR.
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\193\ Other BSA-defined financial institutions, such as broker-
dealers in securities, mutual funds, and banks have separate
reporting obligations that may involve the same suspicious activity.
See 31 CFR 1023.320, 1024.320, 1020.320.
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2. Filing and Notification Procedures
Proposed Sec. 1032.320(b)(1) through (4) sets forth the filing and
notification procedures investment advisers would need to follow to
make reports of suspicious transactions. Within 30 days of initial
detection by the reporting investment adviser of facts that may
constitute a basis for filing a SAR, the adviser would need to report
the transaction by completing and filing a SAR with FinCEN in
accordance with all form instructions and applicable guidance. The
investment adviser would also need to collect and maintain supporting
documentation relating to each SAR separately and make such
documentation available to FinCEN, any Federal, State, or local law
enforcement agency; or any Federal regulatory authority, such as the
SEC, that examines the investment adviser for compliance with the BSA
under the proposed rule, upon request of that agency or authority.
Under the proposed rule with respect to SAR filing obligations for
investment advisers, which are in line with existing SAR regulations
for other BSA-defined financial institutions, any supporting documents
filed with the SAR could also be disclosed to those authorities or
agencies to whom a SAR may be disclosed. For situations requiring
immediate attention, such as suspected terrorist financing or ongoing
money laundering schemes, investment advisers would be required under
Sec. 1032.320(b)(4) to notify immediately by telephone the appropriate
law enforcement authority in addition to filing a timely SAR.
FinCEN requests comment on how an investment adviser would apply
the proposed SAR filing obligation for assets held by a qualified
custodian. FinCEN also requests comment on whether there should be an
exception to the proposed SAR filing requirement for certain violations
that are appropriately reported to the SEC under the Federal securities
laws, or for violations with respect to a mutual fund advised by the
investment adviser. Lastly, FinCEN requests comment on whether the
proposed SAR filing requirement would produce operational or other
challenges.
3. Retention of Records
Proposed Sec. 1032.320(c) would provide 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 would need to be made
available to FinCEN and the prescribed law enforcement and regulatory
authorities, upon request.
4. Confidentiality of SARs
Proposed Sec. 1032.320(d) would provide 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.
1032.320(d)(1)(ii). Section 1032.320(d)(1)(i) would generally provide
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 would further provide that any
investment adviser and any current or former 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, would decline to produce the SAR or such
information and would be required to 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.
Proposed Sec. 1032.320(d)(1)(ii) would provide three rules of
construction that clarify the scope of the prohibition
[[Page 12133]]
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 would 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.
1032.320(d)(1). The rules of construction proposed in this rulemaking
would remain qualified by, and subordinate to, the statutory mandate
that revealing to one or more subjects of a SAR of the SAR's existence
would remain a crime.
The first rule of construction, in Sec. 1032.320(d)(1)(ii)(A)(1),
would authorize an investment adviser, or any director, officer,
employee or agent of an investment adviser, to disclose a SAR, or any
information that would reveal the existence of a SAR, to various
authorities--FinCEN; any Federal, State or local law enforcement
agency; 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 by investment advisers with
FinCEN's rules implementing the BSA to the SEC.
The second rule of construction, in Sec. 1032.320(d)(1)(ii)(A)(2),
would provide two instances where disclosures of underlying facts,
transactions, and documents upon which a SAR was based would be
permissible: in connection with (i) preparation of a joint SAR or (ii)
certain employment references or termination notices. An investment
adviser, or any current or former director, officer, employee, or agent
of an investment adviser, therefore, would not be 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.\194\ Similarly, an
investment adviser, or any current or former director, officer,
employee, or agent of an investment adviser would not be prohibited
from disclosing the underlying facts, transactions, and documents upon
which a SAR is based connection with certain employment references or
termination notices, to the full extent authorized in 31 U.S.C.
5318(g)(2)(B).
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\194\ To the extent permitted by existing FinCEN regulations and
guidance, this would include non-U.S. financial institutions.
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The third rule of construction, in Sec. 1032.320(d)(1)(ii)(B),
would authorize sharing of a SAR within an investment adviser's
corporate organizational structure for purposes consistent with the BSA
as determined by regulation or in guidance.
FinCEN recognizes that the sharing of SARs and other relevant
information indicative of illicit activity can strengthen the ability
of financial institutions to prevent illicit finance activity from
entering the U.S. financial system. FinCEN will consider permitting
investment advisers to share SARs with certain U.S. affiliates,
provided the affiliate is subject to a regulation providing for the
confidentiality of SARs issued by FinCEN or by the affiliate's Federal
functional regulator, and consistent with SAR sharing guidance
finalized in 2010 and applicable to other BSA-defined financial
institutions.\195\ FinCEN requests comment on this specific issue.
FinCEN further requests comment on whether there are other entities or
activities where the sharing of SARs would further the purposes of the
BSA, and if so, how such sharing would be consistent with the BSA and
how investment advisers would be able to maintain the confidentiality
of shared SARs.
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\195\ See FinCEN, 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); FinCEN, Sharing
Suspicious Activity Reports by Depository Institutions with Certain
U.S. Affiliates, FIN-2010-G006 (Nov. 23, 2010).
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Section 1032.320(d)(2) would also incorporate the statutory
prohibition against disclosure of SAR information by government
authorities that have access to SARs other than in fulfillment of their
official duties consistent with the BSA. The paragraph would clarify
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 \196\ or for use in a private legal proceeding, including a
request under 31 CFR 1.11.\197\ Accordingly, the provision would not
permit such disclosure by government users in response to these
requests or uses.
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\196\ For purposes of this rulemaking, ``non-public
information'' refers to information that is exempt from disclosure
under the Freedom of Information Act.
\197\ 31 CFR 1.11 is the Department of the Treasury's regulation
governing demands for testimony or the production of records of
Department employees and former employes in a court or other
proceeding.
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5. Limitation of Liability
Proposed Sec. 1032.320(e) would provide protection from liability,
also known as safe harbor, for making either required or voluntary
reports of suspicious transactions, or for failures to provide notice
of such disclosure to any person identified in the disclosure to the
full extent provided by 31 U.S.C. 5318(g)(3).\198\ This protection
would extend to an investment adviser and any current or former
director, officer, employee, or agent of an investment adviser.
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\198\ 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 safe harbor 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).
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6. Compliance
Proposed Sec. 1032.320(f) would note that FinCEN or its delegates
would examine compliance by investment advisers with the obligation to
report suspicious transactions and provide that failure to comply with
the proposed 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. Consultation
FinCEN will consult on the SAR filing requirements contained in the
proposed rule with the Attorney General and appropriate representatives
of State bank supervisors, State credit union supervisors, and the
Federal functional regulator as required by section 6202 of the AML Act
of 2020 (codified at 31 U.S.C. 5318(g)(5)). Pursuant to this section,
in imposing any requirement to report any suspicious transaction under
this subsection, the Secretary of the Treasury, in consultation with
the Attorney General, appropriate
[[Page 12134]]
representatives of State bank supervisors, State credit union
supervisors, and the Federal functional regulators, shall consider
items that include--
the national priorities established by the Secretary;
the purposes described in section 5311 of the BSA; and
the means by or form in which the Secretary shall receive
such reporting, including the burdens imposed by such means or form of
reporting on persons required to provide such reporting, the efficiency
of the means or form, and the benefits derived by the means or form of
reporting by Federal law enforcement agencies and the intelligence
community in countering financial crime, including money laundering and
the financing of terrorism.\199\
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\199\ 31 U.S.C. 5318(g)(5).
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These items have been considered by the Treasury as described
elsewhere in this proposed rule. The AML/CFT National Priorities
include combatting corruption, fraud, and transnational crime.\200\ For
example, as discussed in section II.C above, the absence of AML/CFT
requirements for investment advisers, including SAR filing
requirements, enables criminals to gain access to the U.S. financial
system for purposes of fraud, laundering the proceeds of corruption,
and other forms of transnational crime. For these reasons, and the risk
of foreign adversaries using investment advisers to gain access to U.S.
technology as discussed in section II.C.2, requiring investment
advisers to file SARs will be highly useful for criminal and regulatory
investigations and intelligence or counterintelligence activities to
combat terrorism, and are otherwise consistent with the purposes set
forth in section 5311 of the BSA. This section, particularly subsection
F.2, details the typologies that should be reported and how advisers
may do so in a risk-based manner most beneficial to Federal law
enforcement and intelligence agencies.
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\200\ See FinCEN, Anti-Money Laundering and Countering the
Financing of Terrorism National Priorities (FinCEN, AML/CFT
Priorities), (Jun. 30, 2021), https://www.fincen.gov/sites/default/files/shared/AML_CFTPriorities(June30%2C2021).pdf.
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Through this rulemaking process, Treasury will consult with the
relevant State and Federal regulators. This proposed rule has already
been sent to the Department of Justice and to the SEC as the Federal
functional regulator for investment advisers for interagency
consultation, and their input on this issue has been invited. Federal
banking regulators have also been invited to comment on all aspects of
this proposed rule. Treasury plans to reach out to the Conference of
State Banking Supervisors as a representative of State banking and
credit union supervisors for consultation on this issue and such
supervisors are invited to comment on this proposed rule through the
public comment process as well.
G. Special Information-Sharing Procedures To Deter Money Laundering and
Terrorist Activity
Proposed Sec. Sec. 1032.500, 1032.520, and 1032.540 would
expressly subject investment advisers to FinCEN's rules implementing
the special information-sharing procedures to detect money laundering
or terrorist activity of sections 314(a) and 314(b) of the USA PATRIOT
Act.\201\ Section 314(a) provides that the Secretary of the Treasury
adopt regulations to encourage the further cooperation and sharing of
information regarding credible evidence of terrorist acts or money
laundering activities among financial institutions, their regulatory
authorities, and law enforcement authorities.\202\ Section 314(b)
provides financial institutions with the ability to share information
regarding parties suspected of possible terrorist or money laundering
activities with another financial institution upon notice to the
Treasury under a safe harbor that offers protections from
liability.\203\
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\201\ See 31 CFR 1010.520, 1010.540.
\202\ See 31 U.S.C. 5311 (statutory notes).
\203\ Id.
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FinCEN's regulations at 31 CFR part 1010, subpart E--in particular,
31 CFR 1010.520 and 1010.540--implement sections 314(a) and 314(b) of
the USA PATRIOT Act, respectively. Section 1010.520, regarding
information sharing with government agencies, applies to financial
institutions generally. Section 1010.540, regarding voluntary
information sharing between financial institutions, applies to
financial institutions that are required to have AML/CFT programs--
i.e., financial institutions that have not been exempted from that
requirement--with certain exclusions. In contrast to the approach
described above, FinCEN proposes to require investment advisers to
apply these requirements to any mutual funds that they advise.
This proposed rule, by designating investment advisers as financial
institutions under the BSA, would apply 1010.520 and 1010.540 to
investment advisers. Proposed Sec. Sec. 1032.500, 1032.520, and
1032.540, moreover, would explicitly subject investment advisers to the
provisions of Sec. Sec. 1010.520 and 1010.540. Section 1032.500 would
state generally that investment advisers are subject to the special
information sharing procedures of subpart E. In turn, proposed 1032.520
would cross-reference 31 CFR 1010.520, and proposed Sec. 1032.540
would cross-reference 31 CFR 1010.540, expressly applying these
provisions to investment advisers. The proposed provisions, therefore,
would make clear that FinCEN's rules implementing section 314 would
apply to investment advisers. These provisions generally would require
an investment adviser, upon request from FinCEN, to expeditiously
search its records for specified information to determine whether the
investment adviser maintains or has maintained any account for, or has
engaged in any transaction with, an individual, entity, or organization
named in FinCEN's request.\204\ An investment adviser would then be
required to report any such identified information to FinCEN.\205\
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\204\ 31 CFR 1010.520(b)(3)(i).
\205\ 31 CFR 1010.520(b)(3)(ii).
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FinCEN is proposing to apply these information sharing requirements
so that investment advisers would be better able to identify and report
money laundering, terrorist financing, and other illicit finance
activity, and the U.S. Government would have a more detailed
understanding of illicit finance activity and risk among investment
advisers. Under the proposed rule, which adopts by reference 31 CFR.
1010.540, law enforcement would be able to request from investment
advisers, where there is reasonable suspicion and credible evidence,
potential lead information that might otherwise never be
uncovered.\206\ Further, investment advisers would be able to
participate in voluntary section 314(b) information sharing
arrangements, through which they would be able to gather additional
information from other financial institutions, which would enable
broader understanding of customer risk and filing of/or file more
comprehensive SARs, for example.\207\
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\206\ FinCEN, FinCEN's 314(a) Fact Sheet (Sept. 5, 2023),
https://www.fincen.gov/sites/default/files/shared/314afactsheet.pdf.
Covered financial institutions are instructed not to reply to the
314(a) request if a search does not uncover any matching of accounts
or transactions.
\207\ FinCEN, FinCEN's 314(b) Fact Sheet (Dec. 2020), available
at https://www.fincen.gov/sites/default/files/shared/314bfactsheet.pdf (noting, in part, that participation in
information sharing pursuant to section 314(b) is voluntary, and
FinCEN strongly encourages financial institutions to participate).
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FinCEN seeks comment on whether the proposed rule should apply the
special information sharing procedures
[[Page 12135]]
under 31 CFR 1010.520 and 1010.540 to investment advisers. FinCEN also
seeks comment on the circumstances under which investment advisers
would enter into voluntary 314(b) information sharing arrangements.
H. Special Standards of Diligence; Prohibitions; and Special Measures
for Investment Advisers
FinCEN's regulations contain several standards, prohibitions, and
other requirements for financial institutions under certain
circumstances in 31 CFR part 1010, subpart F (31 CFR 1010.600 through
1010.670). FinCEN is proposing to apply several of these provisions to
investment advisers. FinCEN would reflect this in a general cross-
reference, proposed Sec. 1032.600, that would state that investment
advisers are subject to those ``special standards of diligence;
prohibitions; and special measures'', and explicitly cross-reference 31
CFR part 1010, subpart F. FinCEN does not propose to permit investment
advisers to exempt from any mutual funds that they advise these
requirements under Subpart F. FinCEN is also proposing several other
regulatory changes to apply these provisions to investment advisers as
discussed further below.
1. Definition of ``Correspondent Account'' and ``Covered Financial
Institution''
FinCEN is proposing to amend two definitions in 31 CFR 1010.605 as
these definitions would apply to investment advisers. First, it would
amend the definition of ``account'' in Sec. 1010.605(c), as applied to
the meaning of ``correspondent account,'' to include, as applied to
investment advisers, ``any contractual or other business relationship
established between a person and an investment adviser to provide
advisory services.'' FinCEN seeks public comment on this definition--
and more broadly how the concept of a ``correspondent account'' may
apply to investment advisers, to the extent investment advisers
establish accounts to handle financial transactions, such as treasury
investment clearing, for foreign financial institutions.
Second, FinCEN is also proposing to revise 31 CFR 1010.605(e)(1)
(as well as add corresponding cross-references as proposed Sec. Sec.
1032.610 and 1032.620) to include investment advisers in the definition
of ``covered financial institution.'' This would have several effects.
First, it would expressly subject investment advisers to FinCEN's rules
implementing special standards of due diligence for correspondent
accounts established or maintained for foreign financial institutions
and private banking accounts established or maintained for non-U.S.
persons.\208\ As described previously and discussed at greater length
below, defining investment advisers as ``covered financial
institutions'' would ordinarily place investment advisers within the
scope of requirements for the collection and verification of beneficial
ownership information of legal entity customers as laid out in Sec.
1010.230. However, as described above, FinCEN expects that the
requirement to collect and verify beneficial ownership information for
legal entity customers to be addressed in a future rulemaking.
Accordingly, the proposed revised Sec. 1010.605(e)(1) would expressly
provide that an investment adviser would not be considered a ``covered
financial institution'' for the purposes of Sec. 1010.230.
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\208\ See 31 CFR 1010.610 and 1010.620. FinCEN notes that it
does not propose in this rulemaking to amend the definition of
``private banking account'' at 31 CFR 1010.605(m).
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2. Special Standards for Diligence
Proposed Sec. Sec. 1032.610 and 1032.620 adopt by reference
Sec. Sec. 1010.610 and 1010.620, which rely on definitions in 1010.605
in implementing section 312 of the USA PATRIOT Act. Section 312 of the
USA PATRIOT Act establishes special due diligence requirements for
private banking and correspondent bank accounts involving foreign
persons.\209\ Because the due diligence requirements of Sec. Sec.
1010.610 and 1010.620 apply to ``a covered financial institution'' as
defined by Sec. 1010.605(e)(1), adding investment advisers to this
definition, as discussed, would subject investment advisers to the
requirements of Sec. Sec. 1010.610 and 1010.620. The proposed rule
would add cross references (proposed Sec. Sec. 1032.610 and 1032.620)
in the proposed investment adviser regulatory part of the FinCEN
regulations, part 1032, directing investment advisers to the due
diligence requirements of Sec. Sec. 1010.610 and 1010.620.
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\209\ Public Law 107-56, section 312 (Oct. 26, 2011), codified
as 31 U.S.C. 5318(i).
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Section 312's implementing regulations require that covered
financial institutions maintain due diligence programs for
correspondent accounts for foreign financial institutions and for
private banking accounts that include policies, procedures, and
controls that are reasonably designed to detect and report any known or
suspected money laundering or suspicious activity conducted through or
involving any such correspondent or private banking accounts.\210\
These provisions also set certain minimum standards for such due
diligence programs, as well as procedures for enhanced due diligence
for correspondent accounts for foreign banks \211\ and private banking
accounts for senior foreign political figures.\212\
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\210\ 31 CFR 1010.610 through 1010.620.
\211\ 31 CFR 1010.610(b).
\212\ 31 CFR 1010.620(c).
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Applying these special standards of due diligence to investment
advisers would assist RIAs and ERAs in understanding risk and
identifying illicit activity in certain intermediated advisory
relationships. Specifically, these standards would address
relationships with high-net worth non-U.S. customers and foreign
financial institutions that may be acting on behalf of higher-risk non-
U.S. customers, when those relationships involve correspondent accounts
for foreign financial institutions or private banking accounts.
FinCEN's proposed rule would subject investment advisers to special
due diligence standards consistent with the special due diligence
standards applied to similarly situated financial institutions under
the BSA. For instance, mutual funds, which are advised by RIAs, are
already subject to the section 312 requirements.\213\ FinCEN requests
comment on whether it is appropriate to apply the special due diligence
requirements for correspondent and private banking accounts as proposed
at Sec. Sec. 1032.610 and 1032.620 to investment advisers, and if
doing so would further the purposes of the BSA and protect the U.S.
financial system from national security threats.
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\213\ 31 CFR 1024.610 and 1024.630.
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3. Special Measures
Section 311 of the USA PATRIOT Act requires U.S. financial
institutions to implement certain ``special measures'' if the Secretary
finds that reasonable grounds exist to conclude that a foreign
jurisdiction, institution, class of transaction, or type of account is
a ``primary money laundering concern.'' \214\ Section 9714(a) of the
Combatting Russian Money Laundering Act allows for similar special
measures in the context of Russian illicit finance.\215\ FinCEN is
proposing that investment advisers be required to comply with special
measures issued pursuant to sections 311 and 9714(a) in order to
maintain the options available under these sections to protect the U.S.
financial system from certain illicit finance threats and to require
investment advisers to meet obligations
[[Page 12136]]
consistent with obligations imposed on other BSA-defined financial
institutions under sections 311 and 9714 special measures.
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\214\ 31 U.S.C. 5318A.
\215\ Section 9714 (as amended) can be found in a note to 31
U.S.C. 5318A.
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As noted above, proposed Sec. 1032.600 would state generally that
investment advisers are subject to FinCEN special measures as set forth
in subpart F of part 1010 and would cross-reference 31 CFR part 1010,
subpart F, which includes section 311 special measures. FinCEN is not
proposing any other regulatory changes specifically to apply sections
311 and 9714 special measures to investment advisers. Some special
measures, however, base their scope in part on 31 CFR 1010.605's
definition of ``covered financial institution.'' \216\ Thus, by
amending that definition to include investment advisers, as discussed,
the proposed rule would be expressly placing investment advisers among
the financial institutions subject to these special measures. FinCEN
requests comment on whether investment advisers enter into advisory
relationships that are similar to a ``private banking account''
relationship as defined at 31 CFR 1010.605.
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\216\ See, e.g., 31 CFR 1010.658(a)(3), 1010.659(a)(5),
1010.660(a)(3), and 1010.661(a)(3).
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V. Request for Comment
FinCEN seeks comment on the rule proposed here and whether the
proposed rule is appropriate in light of the nature of investment
adviser activities and money laundering, terrorism financing, and other
illicit finance risks associated with investment advisers. In
particular, FinCEN seeks comment on the following aspects of the
proposed rule. For all responses, commenters are encouraged to provide
the basis for any conclusions drawn in their comments.
Proposed Definition of Investment Adviser
FinCEN requests comment on all aspects of the definition of
``investment adviser'' as proposed in Sec. 1010.100(nnn). In
particular:
Is the definition of ``investment adviser'' sufficiently
clear?
Are there classes of investment advisers included in the
proposed definition of investment adviser that present a very low risk
for money laundering, terrorist financing, or other illicit finance
activity such that they should appropriately be excluded from the
definition? If so, why would it be appropriate to exclude such advisers
from the definition as opposed to retaining those advisers in the
definition and requiring them to adopt an AML/CFT program that is
appropriate to their level of risk?
To what extent are State-registered and foreign investment
advisers that do not meet the definition of ``investment adviser''
proposed here at risk for being used for money laundering, terrorist
financing, or other illicit finance activity? Should these types of
advisers be included in the proposed definition?
Are there other types of investment advisers that may not
meet the definition in the proposed rule that are at risk for abuse by
money launderers, terrorist financers, or other illicit actors that
should also be subject to the proposed rule for RIAs and ERAs and the
corresponding supervision and examination? Are there any entities
excluded from the definition of ``investment adviser'' under section
202(a)(11) of the Advisers Act, such as family offices, that are at
risk for such abuses?
Should ERAs be excluded from the proposed definition of
investment adviser? How could FinCEN otherwise address the money
laundering, terrorist financing, and other illicit finance risk
associated with ERAs? Are there such risks that are specific to ERAs?
With regard to ERAs, are there differences in the risks
associated with an adviser that qualifies for and elects to use the
exemption under section 203(l) of the Advisers Act as compared to those
associated with an adviser that qualifies for and elects to use the
exemption under section 203(m) of the Advisers Act that would warrant
different treatment under the BSA and the rule proposed here? If so,
please offer examples of how each group may be treated under the
proposed rule noting how their treatment differs in line with their
differing risks.
Are there certain services or activities provided by
investment advisers that present a very low risk for money laundering,
terrorist financing, or other illicit finance activity such that they
could appropriately be excluded, or cases where applying AML/CFT
requirements would result in information of limited value to law
enforcement and regulators? Please provide specific examples if so.
Should the definition of investment adviser apply to non-
U.S. advisers registered or required to register with the SEC (for
RIAs) or that report to the SEC on Form ADV (for ERAs)? What would be
the logistical challenges of this approach?
What are the benefits to and challenges of requiring such
non-U.S. advisers to file reports of suspicious activity with FinCEN on
activities involving U.S. customers or the U.S. financial system?
A. Proposed Requirement To Require Advisers To File CTRs and Comply
With the Recordkeeping and Travel Rules
FinCEN requests comment on the application of the Recordkeeping and
Travel Rules and CTR filing requirements. In particular:
Are there circumstances where investment advisers should
be exempt from complying with the requirements of the Recordkeeping and
Travel Rules?
Do other BSA-defined financial institutions, such as
qualified custodians, already collect and record this information for
customers of investment advisers that they facilitate transactions for?
To what extent do investment advisers already regularly
and consistently collect the information required under the
Recordkeeping and Travel Rules? If you or your firm would be subject to
these requirements, to what extent would it represent an additional
regulatory cost?
To what extent do investment advisers work with qualified
custodians to maintain separate accounts, subaccounts, or similar
products and services to manage a customer's funds, including for
purposes of effecting wire transfers?
B. AML/CFT Program Requirement
FinCEN requests comment on all aspects of the proposed AML/CFT
program requirement for investment advisers. In particular:
Which existing requirements under the Advisers Act or the
regulations adopted thereunder, or other laws or regulations, could
assist investment advisers in complying with the proposed AML/CFT
Program requirements? Are any such existing requirements duplicative
with any proposed requirements?
Which existing measures, such as any existing policies and
procedures, to implement OFAC sanctions may investment advisers be able
to rely on to comply with certain requirements in the proposed rule?
Would an exemption from the requirements of the proposed
rule with respect to customers that are mutual funds be consistent with
the purposes of the BSA and avoiding duplication of existing AML/CFT
requirements for mutual funds?
Instead of exempting investment advisers from the
requirements of the proposed rule with respect to customers that are
mutual funds, should the proposed rule permit investment advisers and
their mutual fund
[[Page 12137]]
customer to delegate their AML obligations amongst each other?
Should investment advisers to mutual funds still be
required to monitor for and file SARs on the mutual fund investors? Why
or why not?
Should the exemption for mutual funds be dependent on the
nature of the relationship between the investment adviser and its
mutual fund customer and the ability of the investment adviser to meet
AML/CFT obligations?
Other than mutual funds, are there other categories of
entities that could be, on a risk-basis, reasonably exempted from an
investment adviser's AML/CFT program? Why or why not?
Should we require an investment adviser to include in its
AML/CFT program all of the advisory services it provides, including
whether acting as the primary adviser or a subadviser?
Are there certain subadvisory activities or circumstances
that should be included or excluded from coverage of this proposed
rule, such as the specific services provided as a subadviser or the
particular type of investment adviser serving as the primary adviser?
To what extent would a subadviser's AML/CFT program
overlap with the primary adviser's AML/CFT program and how could
possible duplication of effort be mitigated? For example, should the
proposed rule expressly permit a subadviser to consider the existence
and operation of the primary adviser's program in satisfying the
subadviser's own obligations?
Is there an increased risk for a subadviser to be used for
money laundering, terrorist financing, or other illicit finance
activity when providing advisory services to a customer that has a
primary adviser that is not an investment adviser (as defined in the
proposed rule)?
Are there other similar arrangements where an investment
adviser may be sub-contracted to provide services to another investment
adviser that should or should not be in scope of an investment
adviser's AML/CFT program?
Do investment advisers that are affiliated with a dually
registered bank or broker-dealer currently apply AML/CFT program
requirements and other AML/CFT measures applicable to the bank or
broker-dealer in any of their advisory activities? If so, which
activities and which requirements are applied?
How do investment advisers that are subsidiaries of banks
currently apply AML/CFT measures that are applicable to their parent
banks?
How do investment advisers that are affiliated with a bank
or broker-dealer apply enterprise-wide AML/CFT requirements? Are there
certain enterprise-wide AML/CFT requirements that are presently
tailored to address the risks arising in advisory activities?
What information do fund administrators currently collect
that would support implementation of the proposed rule?
Is it appropriate to allow an adviser to delegate some
elements of its AML/CFT program to an entity with which the customer,
and not the adviser, has the contractual relationship? This would
include entities providing services to funds advised by the RIA or ERA.
Are there challenges for delegating certain requirements
of the proposed rule to fund administrators? Are there differences in
those challenges for fund administrators whose operations are primarily
conducted inside the United States compared to those whose operations
are primarily conducted outside of the United States?
Can fund administrators whose operations are primarily
conducted outside of the United States collect and provide information
on offshore pooled investment vehicles when that information is
requested by a U.S. investment adviser? What types of challenges might
U.S. investment advisers face in receiving such information?
If some or all requirements of the proposed rule are
delegated to fund administrators whose operations are primarily
conducted outside of the United States, will the investment adviser be
able to effectively monitor implementation of those requirements?
C. Proposed Minimum Requirements of the AML/CFT Program
FinCEN seeks comment on the minimum requirements for an investment
adviser's AML/CFT program as proposed in Sec. 1032.210(b). In
particular:
Should closed-end registered funds, wrap fee programs, or
other types of accounts advised by investment advisers be, on a risk-
basis, reasonably exempted from an investment adviser's AML/CFT
program?
How can the requirements of the proposed rule be applied
to advisers participating in a wrap fee program, to include when an
adviser acting as portfolio manager is either affiliated or not
affiliated with the sponsoring entity of the program?
The requirements of 31 U.S.C. 5318(h)(5) state that the
``duty to establish, maintain and enforce'' the financial institution's
AML/CFT program ``shall remain the responsibility of, and be performed
by, persons in the United States who are accessible to, and subject to
oversight and supervision by, the Secretary of the Treasury and the
appropriate Federal functional regulator.'' FinCEN invites comments on
how this would impact RIAs and ERAs, including the extent to which
compliance with this requirement would require changes to existing AML/
CFT programs and estimated associated costs with any such changes.
1. Applicability to Private Funds
What information is currently available to advisers to
private funds regarding the investors in private funds that could help
advisers comply with the proposed AML/CFT Program requirement?
Are there other factors related to the activities,
investors, or structure of a private fund that could be higher- or
lower-risk?
Should a subadviser to a private fund or other
unregistered pooled investment vehicle with a primary adviser that is
not an investment adviser (as defined in the proposed rule) be required
to establish the same policies, procedures, and internal controls as
when the primary adviser is an investment adviser (as defined in the
proposed rule)?
If an investor in the private fund or other unregistered
pooled investment vehicle is itself a pooled investment vehicle, should
a subadviser to the private fund be required to identify risks and
incorporate policies, procedures, and internal controls within its AML/
CFT program to mitigate the risks of the investing pooled investment
vehicle's investors, sponsoring entity, and/or intermediaries when
there is an increased risk of money laundering, terrorist financing, or
other illicit activity? How might a subadviser identify when increased
risks are present?
How should the proposed rule apply to advisers who manage
private funds that receive investments from in-funds? To what extent
should advisers be able to rely on the AML/CFT Program of advisers to
other funds?
How should the proposed rule apply to an adviser to a
private fund who has funds-of-funds who are investors? To what extent
should they be able to rely on the AML/CFT Program of advisers who
advise funds-of-funds?
[[Page 12138]]
2. Risk-Based Procedures for Ongoing Customer Due Diligence
What customer diligence procedures do RIAs already have in
place to meet the representations in the SIFMA No-Action Letter? Do
ERAs have similar procedures in place?
What other types of information do investment advisers
regularly receive from their customers that could be used to understand
the nature and purpose of a customer relationship?
How would investment advisers exchange information with
other financial institutions involved in facilitating customer
transactions, such as qualified custodians, to understand the nature
and purpose of a customer relationship and conduct ongoing monitoring
to identify suspicious transactions?
How may investment advisers apply the requirement for
ongoing monitoring to identify suspicious transactions differently than
other financial institutions, such as banks and broker-dealers?
3. Identification and Verification of Beneficial Owners of Legal Entity
Customers
Do you agree with the proposal to wait to apply the
requirement to collect and verify the beneficial ownership information
of legal entity accounts at Sec. 1010.230 to investment advisers until
at or after the CTA-mandated revisions to the CDD Rule, or should
Treasury apply the existing requirement as soon as a CIP requirement
for investment advisers is effective?
What types of information regarding private funds, other
than beneficial ownership information, could an investment adviser
collect to understand the nature and purpose of a customer relationship
with a private fund and conduct ongoing monitoring to identify
suspicious transactions involving the private fund?
D. Proposed Suspicious Activity Reporting Rule
FinCEN seeks comment on all aspects of the suspicious activity
reporting rule as proposed in Sec. 1032.320. In particular:
Which existing requirements under the Advisers Act or
other laws or regulations could assist investment advisers in complying
with the proposed SAR requirements?
Should there be an exception to the proposed SAR filing
requirement for certain violations that are appropriately reported to
the SEC under the Federal securities laws?
Should there be an exception to the proposed SAR filing
requirement for violations with respect to a mutual fund advised by the
investment adviser, as proposed? If not, would requiring investment
advisers to file SARs while exempting mutual funds from an investment
adviser's AML/CFT program (as proposed) produce any operational or
other difficulties or challenges?
What guidance would be useful in identifying activity that
may require the filing of a SAR?
How would an investment adviser apply the proposed SAR
filing obligation for assets held by a qualified custodian? How would
an investment adviser obtain, share, and receive information about a
customer or transactions with a qualified custodian regarding potential
suspicious activity?
Would the ability to share SARs with corporate affiliates
that are subject to their own SAR confidentiality regulation assist in
furthering the purposes of the BSA?
Are there other entities or activities where the sharing
of SARs would further the purposes of the BSA? 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. Special Information Sharing Procedures
FinCEN seeks comment on whether the proposed rule should
apply the special information sharing procedures under 31 CFR 1010.520
and 1010.540 implementing sections 314(a) and 314(b) of the USA PATRIOT
Act to investment advisers, as proposed at Sec. Sec. 1032.500 and
1032.540 (cross-referencing 31 CFR part 1010, subpart E, and 31 CFR
1010.540, respectively).
Under what circumstances would investment advisers enter
into voluntary 314(b) information sharing arrangements?
F. Special Due Diligence and Section 311 Measures
FinCEN seeks comment on whether it is appropriate to apply
the special due diligence requirements for correspondent and private
banking accounts to investment advisers as proposed at 1032.610 and
1032.620 (cross-referencing 31 CFR 1010.610 and 1010.620,
respectively), and the special measures under section 311 of the USA
PATRIOT Act as proposed at 31 CFR 1032.600. Would doing so further the
purposes of the BSA and protect the U.S. financial system from national
security threats?
To what extent do investment advisers provide advisory
services or enter into advisory relationships that are similar to a
``correspondent account'' relationship as defined at 31 CFR 1010.605?
What about with respect to a ``correspondent account'' as that term
would be amended, as proposed?
To what extent do investment advisers enter into advisory
relationships that are similar to a ``private banking account''
relationship as defined at 31 CFR 1010.605?
VI. Severability
If any of the provisions of this proposed rule, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given effect
without the invalid provision or application.
VII. Regulatory Analysis
In accordance with Executive Orders 12866, 13563, and 14094 (E.O.
12866 and its amendments),\217\ this regulatory impact analysis (Impact
Analysis) is composed of a number of assessments of the anticipated
impacts of the proposed rule in terms of its expected costs and
benefits to affected parties. This analysis also includes assessments
of the impact on small entities pursuant to the Regulatory Flexibility
Act (RFA) and reporting and recordkeeping burdens under the Paperwork
Reduction Act (PRA), as well as consideration of whether an assessment
under the Unfunded Mandates Reform Act of 1995 (UMRA) is required.
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\217\ See infra.
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This Impact Analysis finds that the impact associated with the
proposed rule would primarily affect investment advisers (specifically,
RIAs and ERAs) and U.S. Federal agencies, and estimates that the total
present value of costs of the proposed rule over a 10-year time horizon
ranges from $4.6 billion to $9.3 billion, with a primary estimate of $8
billion, using a 2 percent discount rate. The annualized costs over a
10-year time horizon range from $500 million to $1 billion, with a
primary estimate of $870 million, using a 2 percent discount rate.\218\
This proposed rule has been determined to be a ``significant regulatory
action'' under section 3(f) of Executive Order 12866 and significant
under section 3(f)(1) because it may have an annual effect on the
economy of $200 million or greater.
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\218\ All aggregate figures are approximate and not precise
estimates unless otherwise specified.
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Table 1 summarizes the benefits and costs of the proposed
regulation. The potential benefits are difficult to quantify--and thus
are unquantified in
[[Page 12139]]
this Impact Analysis--but are reported alongside the monetized costs:
BILLING CODE 4810-02-P
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BILLING CODE 4810-02-C
FinCEN has chosen to issue the proposed rule applying AML/CFT
requirements to RIAs and ERAs instead of two regulatory alternatives:
(1) applying AML/CFT requirements to RIAs, ERAs, and State-registered
investment advisers and (2) requiring private funds to collect
beneficial ownership information on legal entity investors. The first
alternative would expand the requirements of the BSA to nearly twice as
many entities (as compared to the proposed rule) at a greater overall
cost but provide a similar level of benefits (with only limited
[[Page 12140]]
incremental benefits attributable to State-registered investment
advisers), while the second would reduce the costs of the regulation
(as compared to the proposed rule) while providing fewer benefits and
only achieving a small proportion of the objectives of the BSA.
FinCEN has conducted an initial regulatory flexibility analysis
(IRFA) pursuant to the RFA and finds that the proposed rule would have
a significant economic impact on small entities, although FinCEN does
not assess the number of small entities impacted to be substantial.
As detailed in the PRA analysis, for the private sector the
proposed rule is estimated to result in an estimated one-time, upfront
information collection burden of 7.65 million hours and an average
annual information collection burden of 5.49 million hours thereafter.
The estimated one-time, upfront information collection cost is
approximately $454 million and the estimated average annual recurring
information collection cost is approximately $316 million thereafter.
These costs are included in the Impact Analysis.
Pursuant to its UMRA-related analysis, FinCEN has not anticipated
any expenditures for State, local, and Tribal governments. FinCEN
anticipates expenditures by the private sector of more than $176
million.\219\ The UMRA-related analysis for private sector entities has
been incorporated into this Impact Analysis.
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\219\ The U.S. Bureau of Economic Analysis reported the annual
value of the gross domestic product (GDP) deflator in 1995 (the year
in which UMRA was enacted) as 71.823; and in 2022 as 127.215. See
U.S. Bureau of Economic Analysis, Table 1.1.9. ``Implicit Price
Deflators for Gross Domestic Product,'' https://apps.bea.gov/iTable/?reqid=19&step=2&isuri=1&categories=survey%23eyJhcHBpZCI6MTksInN0ZXBzIjpbMSwyLDMsM10sImRhdGEiOltbIkNhdGVnb3JpZXMiLCJTdXJ2ZXkiXSxbIk5JUEFfVGFibGVfTGlzdCIsIjEzIl0sWyJGaXJzdF9ZZWFyIiwiMTk5NSJdLFsiTGFzdF9ZZWFyIiwiMjAyMSJdLFsiU2NhbGUiLCIwIl0sWyJTZXJpZXMiLCJBIl1dfQ. Thus, the
inflation adjusted estimate for $100 million is 127.215 divided by
71.823 and then multiplied by 100, or $177 million.
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A. Executive Orders 12866 and Its Amendments
As detailed below, Treasury assesses that RIAs and ERAs pose a
material risk of misuse for illicit finance. Including investment
advisers as ``financial institutions'' under the BSA and applying
comprehensive AML/CFT measures to these investment advisers are likely
to reduce this risk.
1. Introduction
Executive Order 12866 and its amendments 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, and public
health and safety effects; distributive impacts; and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, reducing costs, harmonizing rules, and promoting flexibility.
This proposed rule has been designated a ``significant regulatory
action'' under section 3(f) of Executive Order 12866 and significant
under section 3(f)(1). Accordingly, the proposed rule has been reviewed
by the Office of Management and Budget (OMB).
In accordance with OMB guidance, this Impact Analysis contains, as
follows: (1) a statement of the need for the regulatory action; (2) a
clear identification of a range of regulatory approaches; and (3) an
estimate of the benefits and costs--quantitative and qualitative--of
the proposed regulatory action and its alternatives.
(a) Statement of the Need for, and Objectives of, the Proposed Rule
The primary purpose of the proposed rule is to address identified
illicit finance risks among investment advisers (i.e., RIAs and ERAs).
Currently, investment advisers are not required by regulation to apply
measures designed to address money laundering, terrorist financing, and
other illicit finance risks similar to those which other financial
institutions are subject. For example, investment advisers are
generally not required to establish an AML/CFT program, to conduct
customer due diligence, or to report suspicious customer activity to
FinCEN. This means that tens of thousands of investment advisers
overseeing the investment of hundreds of trillions of dollars into the
U.S. economy currently do not face regulatory sanction for failing to
implement the above-mentioned measures, creating a material weakness in
the United States's framework to combat illicit finance.
As described in detail above, investment advisers work closely with
and provide services that are similar or related to services authorized
to be provided by other BSA-defined financial institutions.\220\ While
investment advisers do not directly custody customer assets, they
generally must understand their customers' financial background and
investment goals to provide advisory services, and they direct banks
and broker-dealers to execute transactions and disperse funds to
support their customers' investment objectives.
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\220\ See supra section IV.A.
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Under the current AML/CFT regulatory framework applicable to
investment advisory activities, the financial institutions that engage
in trading or transactional activities on behalf of investment
advisers, such as banks and broker-dealers, are subject to AML/CFT
reporting and recordkeeping obligations. However, for many of these
financial institutions, the investment adviser, and not the investment
adviser's customers, is their customer. Consequently, they may rely
solely on an investment adviser's instructions and lack independent
knowledge of the adviser's customers. In some cases, an investment
adviser may be the only person or entity with a complete understanding
of the source of a customer's invested assets, background information
regarding the customer, or the objectives for which the assets are
invested. Additionally, an investment adviser may use multiple broker-
dealers or banks for trading or custody services.
As a result, one financial institution may not have the complete
picture of an adviser's activity or information regarding the identity
and source of wealth of the advisers' customers, and thus may not be
well-positioned to assess whether funds managed by the adviser may be
derived from illicit proceeds or associated with a criminal or other
illicit finance activity. Without complete information, such an
institution may not have sufficient information to warrant filing a
SAR, or may be required to file a SAR that only has partial information
concerning the investment adviser's transactions on behalf of a
particular customer. This limits the ability of law enforcement to
identify illicit activity that may be occurring through investment
advisers.
As discussed in the preamble, the proposed rule would address this
gap by requiring RIAs and ERAs to implement AML/CFT programs, which
include risk-based procedures for conducting ongoing customer due
diligence, and report suspicious activity to FinCEN, among other
requirements. RIAs and ERAs would be subject to examination for
compliance with these requirements by the SEC. This would reduce
instances of investment advisers unwittingly laundering the illicit
proceeds on behalf of clients and increase the likelihood that
authorities could detect illicit activity occurring through investment
advisers and better
[[Page 12141]]
detect complicit investment advisers that knowingly facilitate money
laundering, terrorist financing, or other illicit finance activity. The
proposed rule would also bring the investment adviser industry more in
line with its counterparts in the U.S. financial sector and around the
world.
(b) Summary of the Proposed Rule
The proposed regulations would add ``investment adviser'' to the
definition of ``financial institution'' at 31 CFR 1010.100(t) and add a
new provision to Sec. 1010.100 defining the term ``investment
adviser'' to mean RIAs and ERAs.
With these changes to 31 CFR 1010.100, the proposed rule would then
subject RIAs and ERAs to AML/CFT requirements applied to financial
institutions, including requiring them to: (i) develop and implement an
AML/CFT program; (ii) file SARs and CTRs; (iii) record originator and
beneficiary information for transactions (Recordkeeping and Travel
Rules); (iv) respond to section 314(a) requests; and (v) implement
special due diligence measures for correspondent and private banking
accounts.
AML/CFT Program. RIAs and ERAs would be required to maintain an
AML/CFT program, including: (i) developing internal policies,
procedures, and controls to comply with the requirements of the BSA and
address money laundering, terrorist financing, and other illicit
finance risks; (ii) designating an AML/CFT compliance officer; (iii)
instituting an ongoing employee training program; (iv) soliciting an
independent test of AML/CFT programs for compliance; and (v)
implementing risk-based procedures for conducting ongoing customer due
diligence.
File SARs and CTRs. RIAs and ERAs would be required to file a
report of any suspicious transaction relevant to a possible violation
of law or regulation with FinCEN. In addition, RIAs and ERAs would be
required to report transactions in currency over $10,000. Currently,
all investment advisers report such transactions on Form 8300. Under
the proposed rule, a CTR would replace Form 8300 for RIAs and ERAs.
Recordkeeping and Travel Rules. RIAs and ERAs would be required to
obtain and retain originator and beneficiary information for certain
transactions and pass on this information to the next financial
institution in certain funds transmittals involving more than one
financial institution.
Respond to Section 314(a) Requests. FinCEN's regulations under
section 314(a) enable law enforcement agencies, through FinCEN, to
reach out to financial institutions to locate accounts and transactions
of persons that may be involved in terrorism or money laundering.
Requests contain subject and business names, addresses, and as much
identifying data as possible to assist the financial industry in
searching their records.
Special Due Diligence Measures for Correspondent and Private
Banking Accounts. The proposed rule would require RIAs and ERAs to
maintain due diligence measures that include policies, procedures, and
controls that are reasonably designed to enable the investment adviser
to detect and report, on an ongoing basis, any known or suspected money
laundering or suspicious activity conducted through or involving any
correspondent or private banking account that is established,
maintained, administered, or managed in the United States for a foreign
financial institution.
(c) Discussion of Concurrent/Overlapping/Conflicting Regulations
There are no Federal rules that directly and fully duplicate,
overlap, or conflict with the proposed rule. The majority of the
investment adviser industry is not subject to any comprehensive AML/CFT
requirements. FinCEN is aware that requirements within the Advisers Act
and other Federal securities laws impose requirements upon investment
advisers that in some instances are similar to the requirements
proposed within the proposed rule and perform similar roles (i.e.,
improving the integrity of the U.S. financial system and protecting
customers). FinCEN also recognizes that the Advisers Act and its
implementing regulations authorize the SEC to regulate the investment
adviser industry for compliance with these requirements.
However, while these existing requirements are important, and may
provide a supporting framework for implementing certain obligations in
the proposed rule, they do not impose the specific AML/CFT measures in
the proposed rule in support of the BSA's statutory purposes.
Specifically, investment advisers are not required to develop policies,
procedures, and internal controls to identify and mitigate the risk
that the adviser might be used for money laundering, terrorist
financing, or other illicit finance purposes. Currently, investment
advisers are not required to appoint an AML/CFT officer or train their
employees to comply with AML/CFT requirements. They are not required to
report suspicious activity, maintain certain transaction records, or
respond to section 314(a) requests for information on customer accounts
or transactions. The existing rules and regulations under the Advisers
Act are designed to prevent adviser fraud or theft of client assets and
otherwise protect investors, maintain fair, orderly and efficient
markets, and facilitate capital formation. Preventing illicit actors
from using the investment adviser industry to launder the proceeds of
crime or finance terrorism is not contemplated in existing obligations
on the industry.
FinCEN recognizes that investment advisers that are dually
registered as a broker-dealer or are chartered as a banks (and bank
subsidiaries) or are already subject to AML/CFT requirements. As noted
above, FinCEN is not proposing to require such entities to establish
multiple or separate AML/CFT programs so long as a comprehensive AML/
CFT program covers all of the entity's applicable legal and regulatory
obligations. The program should be designed to address the different
money laundering, terrorist financing, or other illicit finance
activity risks posed by the different aspects of the entities'
businesses and satisfy each of the risk-based AML/CFT program
requirements to which it will be subject in its capacity as an
investment adviser, broker-dealer, or bank under the proposed rule.
Similarly, an investment adviser that is affiliated with, or a
subsidiary of, another entity required to establish an AML/CFT program
in another capacity would not be required to implement multiple or
separate programs because one single program can be extended to all
affiliated entities that are subject to the BSA, so long as it is
designed to identify and mitigate the different money laundering,
terrorist financing, and other illicit finance activity risks posed by
the different aspects of the entity's business and satisfies each of
the risk-based AML/CFT program and other BSA requirements to which the
entity is subject in all of its regulated capacities.
FinCEN is likewise aware that investment advisers serve as advisers
to mutual funds, which have their own AML/CFT program requirements. For
the reasons described above, FinCEN is proposing that an RIA advising a
mutual fund may deem its AML/CFT program requirements with respect to
such mutual fund satisfied so long as the mutual fund has developed and
implemented an AML/CFT program compliant with the AML program
requirements applicable to mutual funds.
FinCEN is also aware that the SEC already examines certain
investment
[[Page 12142]]
advisers for compliance with the Advisers Act and implementing
regulations. FinCEN anticipates that the SEC's examination of RIA and
ERA compliance with new requirements will be incorporated into its
risk-based examination program.
(d) Report Organization
This Impact Analysis is structured as follows. Section 2 assesses
the nature and characteristics of the entities and their business that
will be affected by the proposed rule. Section 3 then identifies the
expected benefits of the proposed rule, and section 4 then assesses the
expected costs of the proposed rule to both the private sector and
government and explains the methodology for doing so. Section 5 then
assesses potential regulatory alternatives to issuing the proposed
rule.
Following the Impact Analysis are the regulatory analyses required
by the RFA, PRA, UMRA, and other similar laws. These analyses rely on
certain calculations in the Impact Analysis. Following those are a
series of questions for public comment regarding the Impact Analysis
and its methodology which aim to test and refine the assumptions and
calculations made within the Impact Analysis.
2. Affected Entities
This section identifies and characterizes the population of
investment advisers that are likely to be impacted by the proposed
rule. The proposed rule would cover both RIAs and ERAs. These groups
generally may vary in terms of their business structure, AUM, number of
employees, and number of client relationships. As explained below,
these differences affect the estimated burden of the proposed rule, in
part, because depending on their business structure, some RIAs and ERAs
may already be implementing AML/CFT measures to some degree.
To establish a pre-regulation baseline, this section provides a
profile of investment advisers likely to be affected by the proposed
rule. First, it describes which investment advisers will be affected by
the proposed rule and on what basis. Next, it describes how RIAs and
ERAs are categorized based on business structure, in ways that align
with the expected costs of the proposed rule. Next, it describes the
baseline level of economic activity for each type of entity. Finally,
it describes other characteristics of the regulated population,
including the number of small businesses.
(a) Universe of Investment Advisers Affected by the Proposed Rule
The Advisers Act defines an investment adviser as a person or firm
that, for compensation, is engaged in the business of providing advice
to others or issuing reports or analyses regarding securities.\221\ The
proposed rule would cover two subsets of investment advisers: RIAs, who
register or are required to register with the SEC; and ERAs, who are
exempt from registration but must report certain information to the
SEC.
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\221\ See 15 U.S.C. 80b-2(a)(11) for this definition of
``investment adviser.'' The statute excludes some persons and firms:
certain banks, certain professionals, certain broker-dealers,
publishers, statistical ratings agencies, and family offices. See 15
U.S.C. 80b-2(a)(11)(A)-(G).
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Each RIA and ERA must submit the Uniform Application for Investment
Adviser Registration (commonly known as Form ADV) and update it on an
annual basis with the SEC.\222\ Form ADV is an SEC-administered self-
disclosure form that collects certain information about each RIA and
ERA. RIAs must report ownership, clients, employees, business
practices, custodians of client funds, and affiliations, as well as any
disciplinary events of the adviser or its employees, and marketing and
certain disclosure reporting materials it provides to clients. ERAs
report a subset of this information.
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\222\ See 17 CFR 275.203-1 and 204-4. A detailed description of
Form ADV's requirements is available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_formadv.html.
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i. SEC Registration and Reporting Criteria
Unless eligible to rely on an exemption, investment advisers that
manage more than $110 million must register with the SEC, rather than a
State authority, as well as submit a Form ADV and update it at least
annually.\223\ Besides having AUM above $110 million, additional
criteria may result in an investment adviser registering with the
SEC.\224\ For example, investment advisers with AUM of at least $100
million but less than $110 million are allowed, but not required, to
register with the SEC. Unless a different exception from the
prohibition on registration applies, investment advisers with AUM under
$100 million are prohibited from registering with the SEC,\225\ but
must register instead with the relevant State securities regulator.
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\223\ Exceptions to this registration requirement include (1)
venture capital advisers, (2) private fund advisers with AUM under
$150 million, (3) advisers to life insurance companies, (4) foreign
private advisers, (5) advisers to charitable organizations, (6)
certain commodity trading advisers, (7) advisers to small business
investment companies, and (8) advisers to rural business investment
companies. See 15 U.S.C. 80b-3(b).
\224\ Other exceptions to the prohibition on SEC registration
include: (1) an adviser that would be required to register with 15
or more States (the multi-State exemption); (2) an adviser advising
a registered investment company; (3) an adviser affiliated with an
RIA; and (4) a pension consultant. Persons satisfying these criteria
and the definition of ``investment adviser'' are required to
register as investment advisers with the SEC. See Form ADV:
Instructions for Part IA, Item 2. Advisers with a principal office
and place of business in New York and over $25 million AUM are
required to register with the SEC.
\225\ 17 CFR 275.203A-1. Note that if an RIA's AUM falls below
$90 million as of the end of such RIA's fiscal year then it must
withdraw its registration with the SEC, unless otherwise eligible
for an exception to the prohibition on SEC registration.
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An ERA is an investment adviser that would be required to register
with the SEC but is statutorily exempt from such requirement because:
(1) it is an adviser solely to one or more venture capital funds, or
(2) it is an adviser solely to private funds and has AUM in the United
States of less than $150 million.\226\ ERAs are required to report to
the SEC on Form ADV.
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\226\ See sections 203(l) and 203(m) of the Advisers Act and 17
CFR 275.203(l)-1 and 275.203(m)-1, respectively.
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ii. Size of the Regulated Population
The number of RIAs and ERAs is well-defined based on the number of
Form ADV filings. Table 2.1 shows the number of RIAs and ERAs as of
July 2023 based on each inclusion criterion listed above. One RIA was
excluded from the regulated population because they reported an
implausibly high number of total clients.
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[GRAPHIC] [TIFF OMITTED] TP15FE24.020
In total, there are 15,391 RIAs, with total AUM of $125 trillion
and roughly 972,000 total employees. There are also 5,846 ERAs with
total gross assets of $5.2 trillion (ERAs do not report the number of
employees to the SEC).\229\ With limited exceptions, the proposed rule
would not apply to RIAs with respect to their mutual funds \230\ (ERAs
do not advise mutual funds).\231\ Therefore, as a practical matter,
RIAs that exclusively advise mutual funds would be exempt from most the
requirements of this rule. Details on cost estimates for these advisers
are provided in the next sub-section.
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\227\ Based on a Treasury review of Form ADV information filed
as of July 31, 2023. See supra n.26. The sum across individual
categories for RIAs and ERAs is greater than the total because each
investment adviser may belong in more than one category.
\228\ This category also includes already-registered RIAs whose
AUM is less than $100 million but at least $90 million.
\229\ ERAs report gross assets for each fund they advise, but
only if that fund is not reported by another RIA in its own Form
ADV; therefore, some ERAs report zero gross assets because all of
the funds they advise are also reported by another RIA.
\230\ See 31 CFR 1010.100(gg). See section IV.B for additional
detail on the treatment of mutual funds under the proposed rule.
\231\ FinCEN does not propose to permit investment advisers to
exempt mutual funds that they advise from the requirements 31 CFR
part 1010, subparts E and F (31 CFR 1010.520, 1010.540, and 1010.600
through 1010.670) that FinCEN proposes to apply to RIAs and ERAs in
the proposed rule (e.g., certain information sharing, special
standards, prohibitions, and other requirements).
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(b) Categorizing the Regulated Population Based on Business Structure
The economic impact of the proposed rule will depend on an
adviser's business structure and the extent to which such an adviser is
already implementing some AML/CFT requirements. FinCEN assesses that
RIAs and ERAs dually registered as broker-dealers or banks, are a
subsidiary or affiliate of a bank or broker-dealer are more likely to
already apply a significant or moderate number of the requirements of
the proposed rule. Additionally, as described below, survey data
indicates that some RIAs are already implementing certain requirements
of the proposed rule.
RIAs and ERAs are also subject to a variety of regulations and
reporting requirements, such as those under the Federal securities
laws, in addition to the proposed rule. In some cases, compliance with
existing regulations under the Federal securities laws may reduce the
burden of the proposed rule. In addition, RIAs and ERAs rely on third-
party entities to execute business services, and those entities may be
required to comply with AML/CFT regulations. Depending on the business
structure of an RIA or ERA, such third-party relationships may also
reduce the burden of the proposed rule.
Therefore, FinCEN categorized RIAs and ERAs based on their
likelihood of having existing AML/CFT measures in place, and the extent
of those measures. This subsection first details the justification for
the categorization, based on the regulatory structure of the investment
adviser industry and associated institutions. The subsection then
describes each category of the regulated population.
i. Dual Registrants and AML/CFT-Compliant Entities Associated With RIAs
and ERAs
Some RIAs and ERAs are dually registered as, subsidiaries of, or
affiliated with, entities that are already subject to AML/CFT
obligations and, therefore, may already be applying such obligations to
their advisory activities, although they may not be legally obligated
to do so.\232\ For instance, dual registrants may seek to provide
customers with both brokerage and advisory services, and apply AML/CFT
measures across their businesses rather than incurring greater costs by
duplicating measures across each business. Additionally, some AML/CFT
measures, such as employee training and initial customer due diligence,
can be designed to apply across a firm rather than to specific
activities.
---------------------------------------------------------------------------
\232\ See Treasury, 2022 National Money Laundering Risk
Assessment, p. 63-66, https://home.treasury.gov/system/files/136/2022-National-Money-Laundering-Risk-Assessment.pdf.
---------------------------------------------------------------------------
Further, in past Treasury outreach to financial institutions, those
that have a financial subsidiary subject to AML/CFT program obligations
as well as a subsidiary investment adviser have indicated they choose
to typically apply an enterprise-wide AML/CFT program extending to all
their subsidiaries and their customers so that all business lines or
entities in their corporate enterprise are subject to consistent risk
practices and procedures.
In other circumstances, an RIA or ERA may perform AML/CFT functions
via contract with a broker-dealer or other financial institution, such
as when the adviser advises a mutual fund, or the adviser may have
voluntarily implemented certain AML/CFT measures, such as due diligence
or identification requirements.\233\ Many RIAs and ERAs also frequently
use the services of certain third-party entities that are required to
comply with AML/CFT regulations, namely, prime brokers, qualified
custodians (e.g., banks), and in some circumstances, fund
administrators.
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\233\ See SIFMA No Action Letter, supra n. 52; see also Managed
Funds Association, Sound Practices for Hedge Fund Managers (2009),
Chapter 6 (Anti-Money Laundering).
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[[Page 12144]]
ii. Existing Laws and Regulations
The Advisers Act and its implementing rules and regulations form
the primary existing framework governing investment adviser activity.
Some rules and regulations that apply to RIAs are relevant to AML/CFT
compliance and may lower the cost of compliance, including, as
discussed further below: (1) the Custody Rule, which governs the
custody of client funds and securities, often through relationships
with qualified custodians who are often subject to AML/CFT
requirements; and (2) the Compliance Rule, which governs policies and
procedures designed to prevent violations of the Advisers Act, and
establishes a procedural and organizational framework that RIAs may be
able to build upon to implement AML/CFT measures, thus lowering the
cost of compliance with the proposed rule.
Custody Rule. The Custody Rule requires that client funds or
securities over which an RIA has custody be held at a qualified
custodian.\234\ The qualified custodian may hold the funds or
securities in separate accounts for each client under that client's
name; or in accounts under the name of the RIA as agent or trustee for
clients, with only client funds and securities inside. Qualified
custodians can be banks, registered broker-dealers, futures commission
merchants, or certain foreign entities. Because such qualified
custodians are BSA-defined financial institutions (or their equivalents
under foreign law) that must comply with AML/CFT regulations, accounts
maintained on behalf of an RIA--and the associated client
relationships--are subject to AML/CFT requirements.
---------------------------------------------------------------------------
\234\ See 17 CFR 275.206(4)-2.
---------------------------------------------------------------------------
Compliance Rule. Under the Compliance Rule,\235\ an RIA must adopt
and implement written policies and procedures reasonably designed to
prevent violations of the Advisers Act and the rules thereunder. RIAs
must review their policies and procedures at least annually and
designate a chief compliance officer to administer the policies and
procedures. Although these policies and procedures do not include
requirements that an RIA comply with the BSA, having written policies
in place may reduce the time needed to develop and review specific AML/
CFT policies and procedures. Alternatively, having a framework in place
for establishing policies and procedures may be useful for RIAs in
complying with the proposed rule. Additionally, the presence of a
compliance officer may reduce costs associated with designating an AML/
CFT compliance officer, for example by dual-hatting the current chief
compliance officer.
---------------------------------------------------------------------------
\235\ See 17 CFR 275.206(4)-7.
---------------------------------------------------------------------------
Other Requirements. Certain private fund advisers also fill out
Form PF, which requires disclosure of limited beneficial ownership
information; for example, the percentage of the fund's equity owned by
broker-dealers, pension plans, and U.S. and non-U.S. persons.\236\ Some
investment advisers may have policies and procedures to comply with
OFAC sanctions, which similarly may provide a framework for
implementing certain AML/CFT measures included in the proposed rule.
---------------------------------------------------------------------------
\236\ See 15 U.S.C. 80b-4(b).
---------------------------------------------------------------------------
Due to these information collection requirements, RIAs and ERAs
already compile varying amounts of information that could be useful in
AML/CFT compliance--particularly information related to the identity
and citizenship of various clients. Such information collection
activities would lower the burden of the proposed rule on RIAs and
ERAs.
iii. RIA and ERA Categories for Cost Analyses
As described above, some RIAs and ERAs are already applying some
AML/CFT requirements (although there is no legal requirement to do so).
This is primarily because of their registration as or affiliation with
another type of BSA-defined financial institution (such as a broker-
dealer). Therefore, the baseline level of AML/CFT measures for an RIA
or ERA may vary with their business structure. For the purposes of the
cost analysis, FinCEN categorized RIAs and ERAs based on business
structure and likelihood of having existing AML/CFT measures in place
in the baseline.
Based on discussions with industry, information from the 2016
Investment Management Compliance Testing Survey (IMCTS Survey), and the
framework described above, FinCEN assessed that dual registrants are
most likely to already have a significant number of AML/CFT measures in
place. An RIA or ERA with a significant number of AML/CFT measures in
place is assessed to be applying most requirements in the proposed
rule, including filing SARs, recordkeeping, information sharing, and
special due diligence measures. Any modifications to existing policies
or procedures, such as training programs, are assumed to be small and
would be incorporated into existing routine maintenance, review, and
updating procedures.
FinCEN also assessed that the majority of RIAs and ERAs affiliated
with a bank or broker-dealer are most likely to have a moderate number
of AML/CFT measures, though they are less likely than dual registrants
to have a significant number AML/CFT measures in place. An RIA or ERA
with a moderate number of AML/CFT measures in place are assessed as
more likely to implement internal recordkeeping, annual training
programs, and initial customer due diligence. However, these RIAs and
ERAs are less likely to meet SAR filing, ongoing due diligence,
information sharing, and special due diligence requirements under the
BSA. These additional measures would need to be implemented under the
proposed rule.
Finally, FinCEN assessed that while most RIAs or ERAs that are not
dually registered or affiliated with a bank or broker-dealer are
currently implementing a limited number of AML/CFT measures, a minority
of that subgroup are currently implementing a moderate number of--
rather than a limited number of--AML/CFT measures. An RIA or ERA with a
limited number of AML/CFT measures in place would need to implement
most of the requirements in the proposed rule, except that they are
likely to be collecting some customer information at the beginning of
the client relationship and filing reports (Form 8300) that are
substantially similar to CTRs.
[[Page 12145]]
First, RIAs and ERAs were categorized into three types of entities
based on business structure: advisers that are dually registered as
broker-dealers or as banks (``dual registrants''); advisers that are
affiliated with a broker-dealer or bank (``affiliated advisers''); and
all others that are not affiliated advisers or dual registrants (i.e.,
``other advisers''). Because broker-dealers and banks must comply with
AML/CFT requirements, dual registrants are more likely to have a
significant number of AML/CFT measures in place, and this is reflected
in the baseline. Similarly, affiliated advisers are more likely than
other advisers to have a moderate number of AML/CFT measures in place
in the baseline. Formally, FinCEN defined each group based on Form ADV
filings as follows:
Dual registrants. RIAs or ERAs that report to the SEC that
they are actively engaged in business as a broker-dealer or bank,
responding ``Yes'' to Item 6.A.(1) and/or Item 6.A.(7).\237\
---------------------------------------------------------------------------
\237\ Items 6.A.(1) and 6.A.(7) on Form ADV require an
investment adviser to identify whether it is actively engaged in a
particular business. This response does not necessarily mean that
the investment adviser is registered as a broker-dealer or as a
bank. The phrase ``dual registrant'' should be interpreted on this
basis for purposes of this analysis.
---------------------------------------------------------------------------
Affiliated advisers. RIAs or ERAs that report to the SEC
that they have a related person that is a broker-dealer or bank
(responding ``Yes'' to Item 7.A.(1) and/or Item 7.A.(8)) and are not
also dual registrants.\238\
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\238\ A related person is any advisory affiliate (as defined for
purposes of Form ADV) of and any person that is under common control
(as defined for purposes of Form ADV) with the investment adviser.
See Form ADV, Glossary of Terms.
---------------------------------------------------------------------------
Other advisers. All RIAs or ERAs that are neither dual
registrants nor affiliates of broker-dealers or banks.
FinCEN separately categorized RIAs and ERAs into the three groups.
Although the size of each group is well-defined based on Form ADV data,
the extent of existing AML/CFT measures within each group is uncertain
and may vary considerably. The 2016 IMCTS Survey collected information
from approximately 700 RIAs on their existing implementation of AML/CFT
measures.\239\ According to the 2016 IMCTS Survey, as of 2016,
approximately 40 percent of RIAs had already adopted AML/CFT policies
consistent with the Second Proposed Investment Adviser Rule.\240\ An
additional 36 percent of RIAs adopted some AML/CFT policies and
procedures, but those were not in line with those in the Second
Proposed Investment Adviser Rule. Therefore, approximately 76 percent
of RIAs had at least some AML/CFT measures in place as of 2016. In
particular, 49 percent had annual employee AML/CFT training, 24 percent
had a designated an AML/CFT compliance officer, and 40 percent
performed independent testing of their AML/CFT program annually.
Similar information was not available for ERAs.
---------------------------------------------------------------------------
\239\ See 2016 IMCTS Survey, supra n. 150.
\240\ Id.
---------------------------------------------------------------------------
Based on this information, FinCEN assumed in the baseline for the
proposed rule, that a minority--but as many as 40 percent--of RIAs had
in place AML/CFT measures consistent with the requirements of the
proposed rule. However, that proportion likely varies across the three
groups defined above. Based on discussions with industry and the
framework described above, FinCEN assessed that dual registrants are
most likely to already have a significant number of AML/CFT measures in
place (even if such measures are not required for their advisory
activities). FinCEN also assessed that the majority of affiliated
advisers implement a moderate number of AML/CFT measures, though they
are less likely than dual registrants to have a significant number of
AML/CFT measures in place. Finally, FinCEN assessed that while most
``other'' advisers are currently implementing a limited number of AML/
CFT measures, a minority are currently implementing a moderate number
of--rather than a limited number of--AML/CFT measures.
Specifically, FinCEN assessed that a dual registrant is highly
likely to be applying a significant number of AML/CFT measures,
including filing SARs, recordkeeping, information sharing, and special
due diligence measures. Any modifications to existing policies or
procedures, such as training programs, are likely to be small and would
be incorporated into existing routine maintenance, review, and updating
procedures.
For RIAs and ERAs with a moderate number of AML/CFT measures in
place, such as most affiliated advisers, FinCEN assessed that existing
programs most likely include internal recordkeeping, annual training
programs, and initial customer due diligence.\241\ However, these RIAs
and ERAs are less likely to meet SAR filing, ongoing due diligence,
information sharing, and special due diligence requirements under the
BSA. These RIAs and ERAs would need to implement additional measures
under the proposed rule.
---------------------------------------------------------------------------
\241\ See, e.g., SIFMA No Action Letter, supra n. 52.
---------------------------------------------------------------------------
The remaining RIAs and ERAs, which have a limited number of AML/CFT
measures in place, would need to implement most of the additional AML/
CFT requirements under the proposed rule. However, FinCEN assessed that
all RIAs and ERAs are likely to be collecting some customer information
at the beginning of the client relationship and filing reports \242\
that are substantially similar to CTRs.
---------------------------------------------------------------------------
\242\ Investment advisers are currently required to file reports
for the receipt of more than $10,000 in cash and negotiable
instruments using joint FinCEN/Internal Revenue Service Form 8300.
See supra, n. 50.
---------------------------------------------------------------------------
Based on this assessment, the RIAs and ERAs in each of the three
groups were divided based on the proportion that FinCEN estimated to be
implementing a significant, a moderate, or a limited number of AML/CFT
measures in the baseline. Because the exact distribution is unknown,
FinCEN used different assumptions to generate lower and upper bounds
and identify a primary estimate. In this case, ``lower bound'' means
more RIAs and ERAs have a significant or moderate number of AML/CFT
measures in place and will have to implement relatively fewer
additional measures under the proposed rule, while ``upper bound''
means more RIAs and ERAs have a limited number of AML/CFT measures in
place and will have to implement relatively more additional measures
under the proposed rule. To inform the primary estimate, FinCEN used
the following assumptions. For RIAs, FinCEN used information from the
2016 IMCTS Survey as a benchmark for the primary estimate.
Based on the 2016 IMCTS Survey, FinCEN assumed that 75 percent of
affiliated RIAs had implemented a moderate number of AML/CFT measures.
Based on the number of affiliated RIAs, the remaining approximately 34
percent of other RIAs are implementing a moderate number of AML/CFT
measures. For the upper bound estimate, FinCEN assumed that the AML/CFT
measures implemented by RIAs and ERAs either under the current
regulatory framework or voluntarily would not meet the requirements of
the proposed rule, therefore all RIAs that are not dually registered
would have to implement the complete set of AML/CFT measures under the
proposed rule. Based on that assumption, all RIAs and ERAs except
dually registered entities are assumed to have implemented a limited
number of AML/CFT measures. For the lower bound estimate, FinCEN
assumed that 40 percent of all RIAs regardless of business structure
are implementing a significant number of AML/CFT measures and 36
percent are
[[Page 12146]]
implementing a moderate number of measures--this includes a mix of
affiliated and other RIAs.
FinCEN lacks information on the extent to which ERAs are already
implementing AML/CFT requirements. Absent a better method to estimate,
FinCEN assumed the proportion of dual-registered, affiliated, and other
ERAs meeting AML/CFT requirements was the same as for RIAs across all
scenarios. FinCEN seeks comment on this assumption, including whether a
more appropriate method to estimate these proportions is available.
Classification of RIAs Advising Registered Funds. As discussed
above, RIAs that exclusively advise mutual funds will be largely exempt
from the requirements of the proposed rule. However, these RIAs have
not been identified specifically through the Form ADV data. FinCEN
assumed these advisers were most likely in the other advisers group.
Because the clients (i.e., the mutual funds) of these RIAs are subject
to comprehensive AML/CFT obligations, FinCEN assessed these advisers as
having a moderate number of AML/CFT measures in place.
Table 2.2 shows the resulting size of the population for each of
the scenarios described above.
[GRAPHIC] [TIFF OMITTED] TP15FE24.021
(c) Baseline Economic and Financial Characteristics of Regulated
Population
---------------------------------------------------------------------------
\243\ Parentheses indicate the percentage of entities within a
given category by scenario. Totals may not sum precisely due to
rounding.
---------------------------------------------------------------------------
This subsection describes the economic and financial profiles of
RIAs and ERAs subject to the proposed rule in the baseline, including
the number of employees and customer relationships with legal entities,
natural persons, and pooled investment vehicles (PIVs)--and annual
changes in these numbers.
i. Number of Employees
RIAs report their employee numbers on Form ADV, but ERAs do not. To
estimate the number of employees at ERAs, FinCEN assumed that the
number of employees was similar to those at RIAs with the same number
of private funds. In particular, the number of ERA employees was
approximated as follows. First, FinCEN focused on RIAs with private
funds only. FinCEN calculated deciles for the number of funds among
each RIA category: dual registrants, affiliated RIAs, and other RIAs.
Then, for each category of ERA, FinCEN calculated the average number of
employees for the decile of the corresponding distribution of RIAs,
based on the number of private funds advised by that ERA. This served
as the approximation for the total number of ERA employees in the cost
calculation. Table 2.3 shows the average number of employees for each
category of investment adviser.
[[Page 12147]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.022
ii. Number of Clients
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\244\ Based on a Treasury review of Form ADV information filed
as of July 31, 2023. See supra n. 26. RIAs report total employees in
Item 5.A. ERA data come from FinCEN calculations, calculated as the
median employment among RIAs that report only private fund clients.
---------------------------------------------------------------------------
On Form ADV, RIAs report the number of clients, enumerated for
specific types of clients.\245\ As described in section 3 of this
Impact Analysis, certain costs of the proposed rule vary depending on
the type of client, across three categories of clients: individual
persons including high-net worth individuals, collectively known as
``natural persons''; PIVs; and various other types of clients
collectively denoted as ``legal entities.'' Table 2.4 shows the average
number of clients of each type, based on the RIA categories defined
above.
---------------------------------------------------------------------------
\245\ Id. Clients are reported in Item 5.D. Natural persons are
calculated as the sum of 5.D.(a).(1) and 5.D.(b).(1). PIVs are
reported in 5.D.(f).(1), and exclude investment companies and
business development companies. Legal entities are the sum of the
remaining rows of column 1 of Item 5.D. Numbers are rounded to the
nearest integer.
[GRAPHIC] [TIFF OMITTED] TP15FE24.023
ERAs report the number of private funds they advise (i.e., an ERA's
clients), including the number of funds for which another investment
adviser already reports fund-specific information. Table 2.5 reports
the average number of funds reported per ERA, based on the investment
adviser categories described above.
[GRAPHIC] [TIFF OMITTED] TP15FE24.024
(d) Other Characteristics of Regulated Entities
---------------------------------------------------------------------------
\246\ Id. The total number of funds is calculated as the sum of
the number of funds reported in Schedule D, sections 7.B.(1) and
7.B.(2). Numbers are rounded to the nearest integer.
---------------------------------------------------------------------------
This section describes the industry classification and business
size of RIAs and ERAs to be regulated under the proposed rule.
i. Industry Classification by NAICS Code
In general, businesses may be categorized under multiple industries
due to having multiple lines of revenue or multiple business functions.
Many RIAs and ERAs, including but not limited to dual registrants,
accordingly may report multiple lines of revenue (for purposes of the
NAICS Codes) on Form ADV, and it is challenging to identify their
primary line of business. Using the North American Industry
Classification System (NAICS), the standard classification system used
by Federal statistical agencies in classifying business establishments
for the purpose of collecting, analyzing, and publishing statistical
data on U.S. businesses, FinCEN assesses that most (if not all) RIAs
and ERAs are classified within NAICS subsector 523 (Securities,
Commodity Contracts, and Other Financial Investments and Related
Activities)--with most entities classified in NAICS 5239 (Other
Financial Investment Activities). However, that subsector may not
account for the primary line of business of all investment advisers and
some may be classified under NAICS 522 (Credit Intermediation and
Related Activities) or NAICS 525 (Funds, Trusts, and Other Financial
Vehicles).
ii. Small Entities
To assess the prevalence of small businesses affected by the
proposed rule, FinCEN relied on the small entity definition under the
Advisers Act rule adopted for purposes of the RFA. Under this
definition, an investment adviser is considered a small entity if (i)
it has, and reports on Form ADV, less than $25 million in assets under
management ; (ii) it has less than $5 million in total assets on the
last day of its most recent fiscal year; and (iii) it does not control,
is not controlled by, and is not under common control with another
[[Page 12148]]
investment adviser that is not a small entity.\247\
---------------------------------------------------------------------------
\247\ 17 CFR 275.0-7 (defining ``small business'' or ``small
organization'' for purposes of the Advisers Act).
---------------------------------------------------------------------------
On Form ADV, RIAs report whether they meet the conditions listed
above. As of July 2023, there were 573 small entities, as reported in
Table 2.6. ERAs do not report whether they meet the conditions above.
However, based on a recent SEC rulemaking, and using the SEC's
rationale here, FinCEN concluded that zero ERAs met the definition of
small entity.\248\
---------------------------------------------------------------------------
\248\ The SEC's rationale, which FinCEN adopts, is that for an
investment adviser to constitute an ERA for SEC purposes, the
adviser would need to have an obligation to register with the SEC.
An investment adviser with assets under management low enough to
qualify as a small entity would not have an obligation to register
with the SEC. See 88 FR 63206, 63383 n. 1895 regarding small entity
ERAs.
[GRAPHIC] [TIFF OMITTED] TP15FE24.025
Table 2.7 shows the characteristics of small RIAs compared to all
other RIAs.
---------------------------------------------------------------------------
\249\ Based on a Treasury review of Form ADV information filed
as of July 31, 2023. See supra n. 26. An RIA qualifies as a small
entity under the SEC's definition if it has fewer than $25 million
in regulatory AUM (Item 5.F.(2)(c)) and answers ``No'' to each of
the questions in Item 12. ERAs were presumed not to meet the
definition of small entity, as discussed above.
\250\ Id. See tables above for details on the Form ADV items
used to calculate each table entry. Numbers are rounded to nearest
whole number or percent.
[GRAPHIC] [TIFF OMITTED] TP15FE24.026
3. Assessment of Benefits
The benefits assessed here are more difficult to quantify than the
costs, but are nonetheless substantial. The primary direct benefits of
the proposed rule are expected to primarily accrue in the public
sector, most notably to U.S. law enforcement and the national security
community, as well as certain Federal functional regulators, as well as
to the investment adviser industry. Further, the identification of
illicit activity in the investment adviser industry by applying
reporting and recordkeeping obligations to those industry participants,
RIAs and ERAs, that have direct access to customer information would
enhance detecting, investigating and prosecuting illicit finance
activity occurring through the industry. The AML/CFT requirements in
the proposed rule will help address existing information gaps regarding
suspicious activity reporting discussed in section 1. They will also
help harmonize AML/CFT requirements between investment advisers and
similarly situated financial institutions that must comply with these
requirements.
In addition, while each provision in the proposed rule may not
directly provide a benefit, each provision indirectly does so because
it forms part of a comprehensive framework for identifying and
reporting money laundering, terrorist financing, or other illicit
finance activity. For instance, while the requirement for employee
training and independent testing do not directly lead to increased
identifying of illicit finance activity, they help ensure that the
systems and employees who will identify whether an investment adviser
is being used for such activity are best positioned to do so.
Specific benefits from the proposed rule include (i) increasing
access for law enforcement to relevant information for complex
financial crime investigations, (ii) enhancing interagency
understanding of priority national security threats and their
associated financial activity, and (iii) improving financial system
transparency and integrity, including by aligning with international
financial standards to strengthen the U.S. financial system from abuse
by illicit actors. Through these direct benefits, crucial indirect
benefits would accrue to the public at large by reducing money
laundering, countering the financing of terrorism and other illicit
finance activity, and protecting national security.
(a) Strengthening Law Enforcement Investigations of Certain Financial
Crimes
Requiring RIAs and ERAs to file SARs and keep certain customer
records would make that information more readily available to law
enforcement authorities, assisting those authorities in detecting,
investigating, and prosecuting financial crimes. The FBI reported that
36.3 percent of active complex financial crimes investigations and 27.5
percent of public corruption investigations involved BSA
reporting.\251\ However, for other types of criminal investigations,
the percentage of criminal investigations supported by BSA reporting
was even higher. For example, 46 percent of
[[Page 12149]]
transnational organized crime investigations were supported by BSA
reporting.\252\ SAR filing by RIAs and ERAs may increase BSA
information availability to support investigations into corruption,
fraud, and tax evasion, the criminal activities that the Treasury risk
assessment identified as being most prominently tied to illicit
proceeds moving through investment advisers.\253\
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\251\ See FinCEN, Year in Review for FY 2022 (Apr. 21, 2023),
p.2, https://www.fincen.gov/sites/default/files/shared/FinCEN_Infographic_Public_2023_April_21_FINAL.pdf.
\252\ Id.
\253\ See Treasury, Investment Adviser Illicit Finance Risk
Assessment, https://home.treasury.gov/system/files/136/US-Sectoral-Illicit-Finance-Risk-Assessment-Investment-Advisers.
---------------------------------------------------------------------------
In particular, information from the reporting of suspicious
activity and recordkeeping by RIAs and ERAs may benefit specific types
of law enforcement financial crime investigations, particularly those
involving the proceeds of foreign corruption, along with other
transnational financial crimes. For instance, according to the FBI, in
the 1MDB criminal investigation, at least $1 billion traceable to the
conspiracy was laundered through the United States, including through
private funds advised by at least one RIA, and used to purchase assets
here.\254\ In another case involving the misuse of private funds, the
defendant established fake private equity investment funds in the
British Virgin Islands to launder approximately $400 million in
proceeds of a large international pyramid fraud scheme called
OneCoin.\255\ These examples demonstrate that investment advisers and
the funds they advise have been implicated in certain financial crimes,
and show the scope of potential benefit from covering RIAs and ERAs
under this proposal.
---------------------------------------------------------------------------
\254\ See FBI, ``U.S. Seeks to Recover $1 Billion in Largest
Kleptocracy Case to Date,'' (Jul. 20, 2016), https://www.fbi.gov/news/stories/us-seeks-to-recover-1-billion-in-largest-kleptocracy-case-to-date.
\255\ See Department of Justice, ``Former Partner Of Locke Lord
LLP Convicted In Manhattan Federal Court Of Conspiracy To Commit
Money Laundering And Bank Fraud In Connection With Scheme To Launder
$400 Million Of OneCoin Fraud Proceeds,'' (Nov. 21, 2019), https://www.justice.gov/usao-sdny/pr/former-partner-locke-lord-llp-convicted-manhattan-federal-court-conspiracy-commit-money.
---------------------------------------------------------------------------
Further, requiring RIAs and ERAs to respond to section 314(a)
requests is likely to increase the number of positive responses for law
enforcement when trying to locate accounts and transactions of persons
that may be involved in terrorism or money laundering activity. In FY
2022, 66 law enforcement agencies made 519 requests under section
314(a) to over 14,000 financial institutions, which resulted in 37,865
positive responses.\256\ Adding RIAs and ERAs to these requests is
likely to increase positive responses for account and transactions
information and then support further investigations using other legal
tools.
---------------------------------------------------------------------------
\256\ Id.
---------------------------------------------------------------------------
(b) Improve Understanding of Priority National Security Threats
Applying AML/CFT obligations to RIAs and ERAs may help increase
U.S. government understanding of two priority national security
threats: (1) funds moving through the U.S. financial system that may be
associated with Russian oligarchs and (2) investment activity that may
be tied to foreign-state efforts to invest in early-stage companies
developing critical or emerging technologies with national security
implications.
SAR filings or information collected by RIAs and ERAs in the CDD
process could improve the U.S. government's understanding of how
illicit funds linked to Russian oligarchs may be accessing the U.S.
financial system. According to FinCEN, BSA data provides significant
financial intelligence about the movement of oligarch-related funds and
assets with a nexus to the United States around the time of Russia's
unprovoked military invasion of Ukraine, including likely attempts by
Russian oligarchs and elites to conceal their assets, property, and
financial activities.\257\ Both U.S. law enforcement and press
reporting have identified instances where Russian oligarchs and elites
have accessed U.S. investment opportunities and the financial system
through private funds or other PIVs, to avoid disclosing their
identities to other parties.\258\
---------------------------------------------------------------------------
\257\ See FinCEN, Trends in Bank Secrecy Act Data: Financial
Activity by Russian Oligarchs in 2022 (Dec. 2022), https://www.fincen.gov/sites/default/files/2022-12/FinancialTrendAnalysisRussianOligarchsFTA_Final.pdf.
\258\ See Department of the Treasury, Global Advisory on Russian
Sanctions Evasion Issued Jointly by the Multilateral REPO Task
Force, p. 3, (Mar. 9, 2023), https://home.treasury.gov/system/files/136/REPO_Joint_Advisory.pdf; see also FinCEN, Alert on Potential
U.S. Commercial Real Estate Investments by Sanctioned Russian
Elites, Oligarchs, and Their Proxies, p. 4, (Jan. 25, 2023), https://www.fincen.gov/sites/default/files/shared/FinCENAlertRealEstateFINAL508_1-25-23FINALFINAL.pdf.
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However, FinCEN currently receives only limited information from
investment advisers and the securities industry in general regarding
illicit Russian financial activity. For instance, of 454 SARs reviewed
as part of a FinCEN Financial Trend Analysis on U.S. financial activity
linked to Russian oligarchs, only 11, or less than 3 percent, were
filed by the securities and futures industry.\259\
---------------------------------------------------------------------------
\259\ See supra n. 257.
---------------------------------------------------------------------------
Applying SAR filing, CDD, and other recordkeeping requirements to
RIAs and ERAs may also assist the U.S. government in identifying
foreign-linked investments in certain U.S. companies that could raise
national security issues. While there are certain transactions of which
CFIUS must be notified, most transactions reviewed by CFIUS are filed
voluntarily.\260\ Where transactions are not voluntarily submitted to
CFIUS for review, CFIUS agencies must invest staff time and resources
into identifying those transactions and assessing whether to request
that the parties file with CFIUS.\261\ CFIUS transactions that
originate through this non-notified process remain among the most
complicated that CFIUS considers, and often require mitigation measures
to address national security risks.\262\
---------------------------------------------------------------------------
\260\ See Treasury, ``Remarks by Assistant Secretary for
Investment Security Paul Rosen at the Second Annual CFIUS
Conference,'' (Sept. 14, 2023), https://home.treasury.gov/news/press-releases/jy1732.
\261\ See id.
\262\ Committee on Foreign Investment in the United States--
Annual Report to Congress CY 2022 (https://home.treasury.gov/system/files/206/CFIUS%20-%20Annual%20Report%20to%20Congress%20CY%202022_0.pdf), p. 52
---------------------------------------------------------------------------
Assessing the national security consequences of investments into
early-stage companies developing emerging technology can be
particularly challenging.\263\ Requiring ERAs, particularly venture
capital advisers, to submit SARs may help CFIUS agencies identify
transactions where investors affiliated with foreign governments are
attempting to use an investment to acquire technology or know-how with
national security implications. This could include providing
information about transactions CFIUS was unaware of, or providing new
information about investors or other parties to transactions CFIUS was
already investigating. In addition, law enforcement agencies involved
in CFIUS reviews could use section 314(a) information sharing
authorities to engage venture capital advisers or other RIAs or ERAs on
particular technologies or concerning foreign investors.
---------------------------------------------------------------------------
\263\ See The Washington Post, ``Scrutiny mounts over tech
investments from Kremlin-connected expatriates,'' (Dec. 19, 2022),
https://www.washingtonpost.com/technology/2022/12/19/russia-expatriates-links-probed/; see also The Wall Street Journal,
``Government `SWAT Team' Is Reviewing Past Startup Deals Tied to
Chinese Investors,'' Jan. 31, 2021, https://www.wsj.com/articles/government-swat-team-is-reviewing-past-startup-deals-tied-to-chinese-investors-11612094401.
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(c) Protect the U.S. Financial System From Abuse
Applying AML/CFT obligations to RIAs and ERAs will also strengthen
the
[[Page 12150]]
ability of the Federal Government and private sector to better protect
the U.S. financial system from being misused for illicit finance.
First, the proposed rule would apply a set of AML/CFT obligations to
RIAs and ERAs, and those investment advisers would be subject to
enforcement actions for failure to comply with those requirements.
Those investment advisers would be required to, as described above,
implement AML/CFT programs, conduct due diligence on customers, report
suspicious activity, and keep certain records, among other obligations.
In doing so, these obligations imposed on investment advisers would
help identify, prevent, and deter bad actors from using investment
advisers to further illicit financial activity, as investment advisers
would be required to obtain information from customers to comply with
these requirements.
Moreover, the proposed rule will also strengthen the ability of
RIAs, ERAs, and other financial institutions to identify and report
illicit activity. RIAs and ERAs would be able to coordinate with
broker-dealers and banks to file joint SARs, and voluntarily share
information on illicit activity under section 314(b) of the USA PATRIOT
Act. Reporting by financial institutions under the BSA--and their
broader efforts to implement effective AML/CFT programs--are thus
fundamental to the government's effort to detect and prevent illicit
financial activity and to protect the integrity of the financial system
as a whole.
The proposed rule would also help bring the United States into full
compliance with several international AML/CFT standards established by
the Financial Action Task Force (FATF). In the 2016 FATF Mutual
Evaluation Report (MER) of the United States, the United States was
rated (and remains rated) ``partially compliant'' on nine of the 40
FATF Recommendations.\264\ These included partially compliant ratings
on Recommendations 1, 12, and 20 for the failure to apply AML/CFT
requirements to investment advisers, among other reasons.\265\
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\264\ See FATF (2016), Mutual Evaluation of the United States,
pp. 255-258, https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf. In 2020, the
U.S. was re-rated from ``partially compliant'' to ``largely
compliant'' on Recommendation 10. See FATF (2020), Anti-money
laundering and counter-terrorist financing measures--United States,
3rd Enhanced Follow-up Report & Technical Compliance Re-Rating (2020
US FUR), https://www.fatf-gafi.org/content/dam/fatf-gafi/fur/Follow-Up-Report-United-States-March-2020.pdf.coredownload.pdf.
\265\ A ``partially compliant'' rating is generally not
considered an acceptable rating for purposes of the FATF Follow-Up
Process. See FATF (2023), Procedures for the FATF Fourth Round of
AML/CFT Mutual Evaluations (FATF Fourth Round Procedures), pp. 22-
23, http://www.fatf-gafi.org/publications/mutualevaluations/documents/4th-round-procedures.html.
---------------------------------------------------------------------------
As a result of its MER, the United States was put in ``enhanced
follow-up.'' \266\ For countries in enhanced follow-up, the FATF can
take several actions, including ``issuing a formal FATF statement to
the effect that the member jurisdiction is insufficiently in compliance
with the FATF Standards, and recommending appropriate action.'' \267\
These statements and other actions by the FATF can have material
consequences on the economy of a jurisdiction.\268\ If the proposed
rule is finalized, it will assist the U.S. in avoiding these
consequences and strengthening compliance with the FATF standards.
---------------------------------------------------------------------------
\266\ See 2020 US FUR, p. 1, supra n. 264.
\267\ See FATF Fourth Round Procedures, p. 24, supra n. 265.
\268\ See Julia Morse, The Bankers Blacklist: Unofficial Market
Enforcement and the Global Fight against Illicit Financing (Cornell
University Press 2021), pp. 131-138 (discussing the consequences of
FATF listing).
---------------------------------------------------------------------------
As noted in the Treasury investment adviser risk assessment,\269\
investment advisers manage tens of trillions of dollars in assets.
While some of these assets are subject to AML/CFT requirements, others
are not. For instance, RIAs manage approximately $20 trillion in
private fund assets, and as of Q4 2022, this included $284 billion in
AUM owned by non-U.S. investors where the RIA did not have the
information on hand to identify the beneficial owner because the
beneficial interest was held through a chain involving one or more
third-party intermediaries.\270\ ERAs held approximately $5 trillion in
AUM in private funds.
---------------------------------------------------------------------------
\269\ See Treasury, Investment Adviser Illicit Finance Risk
Assessment, https://home.treasury.gov/system/files/136/US-Sectoral-Illicit-Finance-Risk-Assessment-Investment-Advisers.
\270\ See SEC, Private Fund Statistics, First Calendar Quarter
2022, private-funds-statistics-2022-q1.pdf (sec.gov).
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4. Assessment of Costs
This section assesses the potential costs to RIAs and ERAs, their
clients, and government agencies associated with the proposed rule.
Specifically, this Impact Analysis estimates the one-time, upfront
costs and recurring administrative and maintenance costs incurred by
RIAs and ERAs to establish or modify an existing AML/CFT program, which
includes conducting ongoing CDD, filings SARs, and the other
requirements of the proposed rule. It also estimates costs to customers
to provide additional information to RIAs and ERAs and to the
government to enforce those requirements. This Impact Analysis
estimates the incremental costs of the proposed regulation over a 10-
year period.
Some RIAs and ERAs may have reduced costs because they may already
perform certain AML/CFT functions because they are dual registrants or
affiliated advisers, as described in section 2, although, depending on
the entity and its structure, may not currently be required to do so.
RIAs that are dual registrants or affiliated advisers would not be
legally required to establish a separate AML/CFT program for their
advisory activities, provided that an existing comprehensive AML/CFT
program covers all of the entity's legal and regulatory obligations.
RIAs would also be exempt from having to apply most of the proposed
requirements with respect to the mutual funds they advise, as mutual
funds have their own AML/CFT program requirements, must file SARs, and
are otherwise required to comply with the other reporting and
recordkeeping requirements included in the proposed rule. Certain RIAs
and ERAs may also already collect and verify certain information
provided by customers via contract for a joint customer with another
financial institution or through a voluntary AML/CFT program.
This section is organized as follows. First, it describes and
compiles relevant cost information associated with these activities.
Based on this information, it estimates the costs likely to be incurred
by RIAs and ERAs. It then describes government implementation costs for
oversight and enforcement. Finally, it summarizes the total costs of
the proposed regulation.
(a) Cost Methodology
This section describes and compiles relevant cost information for
this Impact Analysis. Based on this information, FinCEN estimates the
typical costs RIAs and ERAs are anticipated to incur to comply with the
requirements of the proposed rule. The cost information consists of the
amount of time (in hours) and hourly labor cost of staff involved in
compliance activities, such as developing and updating AML/CFT policies
and procedures and training staff on new requirements, as well as costs
associated with third party software licensing and independent testing.
The implementation and scope of these activities, however, will vary
widely and depend on a number of factors, such as the degree of
automation of compliance activities and level of filer sophistication.
[[Page 12151]]
All costs are reported in 2022 dollars. For transparency, all costs
in this section are reported on an undiscounted basis. At the end of
this section, costs are also reported on a discounted basis and the
annualized costs of the proposed rule are calculated. To estimate the
value of time associated with various compliance activities, FinCEN
identified roles and corresponding staff positions involved in
reviewing regulatory requirements, developing policies and procedures,
filling out forms, transmitting data, conducting training, and
maintaining, updating, and obtaining written approval of AML/CFT
programs. FinCEN calculated the fully loaded (i.e., wages plus
benefits, leave, etc.) hourly labor cost for each of these roles by
using the median hourly wage estimated by the U.S. Bureau of Labor
Statistics and computing an additional factor accounting for fringe
benefits as reported in Table 4.1.\271\ Note, the proposed regulation
requires, at a minimum, that an AML/CFT program must designate an AML/
CFT compliance officer. This Impact Analysis does not include the
direct cost of hiring a full-time equivalent AML/CFT compliance
officer, which is not required by the proposed rule.\272\ RIAs must
already designate a chief compliance officer responsible for
administering policies and procedures to comply with the Advisers Act
and the rules thereunder. In smaller banks and broker-dealers,
compliance or legal officers are often dual-hatted as AML/CFT
compliance officers. Similarly, FinCEN assumes many RIAs and ERAs will
appoint or dual hat a compliance or legal officer as their AML/CFT
compliance officer. Therefore, this Impact Analysis accounts directly
for the fully loaded hourly labor costs (i.e., salary plus fringe
benefits) for each compliance activity that would be performed by this
individual rather than by calculating an annual salary, to avoid
double-counting labor costs for each requirement.
---------------------------------------------------------------------------
\271\ U.S. Bureau of Labor Statistics, May 2022 National
Industry-Specific Occupational Employment and Wage Estimates for
NAICS 523000--Securities, Commodity Contracts, and Other Financial
Investments and Related Activities. The adjustment factor for fringe
benefits is calculated as 1 + ($18.26 per hour in total benefits /
$36.57 per hour in wages and salaries) = 1.50. Based on U.S. Bureau
of Labor Statistics, Table 4. Employer Costs for Employee
Compensation for Private Industry Workers by Occupational and
Industry Group--Financial Activities Industry, June 2022.
\272\ This is consistent with how FinCEN assesses burden hours
and costs associated with the designation of a BSA officer, whereby
the costs are assessed individually across other BSA regulatory
requirements that the designated officer may implement. See FinCEN,
Agency Information Collection Activities; Proposed Renewal; Comment
Request; Renewal Without Change of Anti-Money Laundering Programs
for Certain Financial Institutions, 85 FR 49418 (Oct. 13, 2020).
\273\ See U.S. Bureau of Labor Statistics, May 2022 National
Industry-Specific Occupational Employment and Wage Estimates for
NAICS 523000--Securities, Commodity Contracts, and Other Financial
Investments and Related Activities.
\274\ See U.S. Bureau of Labor Statistics, Table 4. Employer
Costs for Employee Compensation for Private Industry Workers by
Occupational and Industry Group--Financial Activities Industry, June
2022.
[GRAPHIC] [TIFF OMITTED] TP15FE24.027
FinCEN estimates that, in general and on average, each role would
spend different amounts of time on each portion of the compliance
burden associated with the proposed rule. These assumptions are
provided in detail below for each compliance activity.
In addition to incurring labor costs, RIAs and ERAs will likely
need to invest in new technology to comply with the proposed rule,
including purchasing software and entering into licensing agreements
with third party vendors. Although financial institutions are not
required to use software to meet their AML/CFT requirements, most
entities currently subject to the BSA use specialized AML/CFT software
for this purpose. It is challenging to allocate technology costs to
specific provisions of the proposed regulation as technology may be
used to implement and automate several processes.\275\ This Impact
Analysis uses estimates derived from a 2020 Government Accountability
Office (GAO) report assessing the costs of financial institutions to
comply with the BSA to quantify these technology costs.\276\ GAO
documented a wide range of compliance costs across a diverse group of
banks. For estimating technology and other costs in this Impact
Analysis, FinCEN relied on the reported values for ``Large Community
Bank B,'' for which the costs were assessed to be most similar to the
costs likely to be incurred by the entities affected by the proposed
regulation. FinCEN seeks comment on this assumption. Table 4.2 reports
selected characteristics for this benchmark.
---------------------------------------------------------------------------
\275\ Government Accountability Office, Anti-Money Laundering:
Opportunities Exist to Increase Law Enforcement Use of Bank Secrecy
Act Reports, and Banks' Costs to Comply with the Act Varied (GAO-20-
574), (Sept. 2020), https://www.gao.gov/products/gao-20-574 (2020
GAO BSA Report). The 2020 GAO BSA Report noted that it reported
software costs separately and did not allocate them by requirement
because the banks reviewed commonly used the same software to meet
multiple BSA/AML requirements.
\276\ Id.
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[[Page 12152]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.028
Table 4.3 reports the estimated compliance costs for specialized
AML/CFT software and an independent annual audit to test the AML/CFT
program. The costs are based on values for the financial institution
benchmark described in the previous paragraph adjusted for inflation to
2022 dollars using the GDP implicit price deflator.\278\
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\277\ Id at Table 111: Selected Characteristics of Large
Community Bank B, 2018.
\278\ Bureau of Economic Analysis, National Income and Product
Accounts Tables, Table 1.1.9. Implicit Price Deflators for Gross
Domestic Product, https://www.bea.gov/itable/national-gdp-and-personal-income.
[GRAPHIC] [TIFF OMITTED] TP15FE24.029
(b) Compliance Costs to Industry by Regulatory Provision
---------------------------------------------------------------------------
\279\ See 2020 GAO BSA Report at Table 113, supra n. 275.
---------------------------------------------------------------------------
As described in section 2, the regulated universe for purposes of
the proposed rule consists of RIAs and ERAs, which vary in terms of
their business structure, size, client relationships, and degree of
existing AML/CFT measures already in place. Across these advisers,
several characteristics vary across groups that directly impact the
magnitude of the estimated costs, including the average number of
employees and the number/type of customer relationships. However, the
most significant cost determinant is the extent of existing AML/CFT
measures in place--RIAs and ERAs with established AML/CFT programs in
place will likely incur relatively fewer costs under the proposed rule,
while those with few AML/CFT measures in place may incur potentially
more significant costs.
For the purposes of estimating the cost impacts of the proposed
rule, this Impact Analysis has sub-divided RIAs and ERAs into groups
based on: (1) whether they are dual registrants, affiliated advisers,
or other advisers (as described in section 2); and (2) whether they
have a significant, moderate, or a limited number of AML/CFT measures
already in place (see Table 2.2). FinCEN believes that these sub-
divisions are the best available method of estimating the cost impacts,
but FinCEN invites comment on whether some other method of sub-dividing
the industry for cost-estimate purposes would be preferable.
i. AML/CFT Program Costs
RIAs and ERAs subject to the proposed rule will need to implement
and maintain an AML/CFT program that meets the minimum requirements of
the BSA. This includes developing internal policies, procedures, and
controls to comply with the requirements of the BSA and address money
laundering, terrorist financing, and other illicit finance risks.
Entities that do not already have a AML/CFT program in place will incur
costs to establish such a program. In addition, those entities will
incur costs for maintaining, updating, storing, and producing upon
request the written AML/CFT program. Dual registrants or affiliated
advisers would not have to establish multiple AML/CFT programs,
provided that an existing comprehensive AML/CFT program would cover all
of the entity's advisory businesses. Entities that already have an
existing AML/CFT program will need to review and/or modify their AML/
CFT program to ensure it complies with the requirements of the proposed
rule. As firms that have an existing AML/CFT program are expected to be
already maintaining, updating, storing, and producing upon request the
written program, FinCEN estimates these firms will incur no additional
costs beyond reviewing/modifying and obtaining written approval in the
first year after the promulgation of the proposed regulation.
Based on public comments on the Second Proposed Investment Adviser
Rule,\280\ FinCEN estimates it will take approximately 120 hours to
develop the necessary policies and procedures to establish an AML/CFT
program for affiliated or other RIAs and ERAs that have a limited
number of existing AML/CFT measures in place. FinCEN assumes that
dually registered entities covered by an existing AML/CFT program and
entities that have a significant or moderate number of AML/CFT measures
in place would only need to update their existing program. FinCEN
assumes the vast majority of entities would develop or update a written
program within the first year after the promulgation of the regulation.
Once established, FinCEN estimates annually it will take approximately
1
[[Page 12153]]
hour to maintain and update the existing AML/CFT program plus an
average of 10 minutes to store and produce upon request the written
AML/CFT program. Table 4.4 reports the average costs of establishing
and maintaining an AML/CFT program.
---------------------------------------------------------------------------
\280\ See Public Comments, Docket ID FINCEN-2014-0003, https://www.regulations.gov/docket/FINCEN-2014-0003/comments.
[GRAPHIC] [TIFF OMITTED] TP15FE24.030
In addition, the AML/CFT program must be approved in writing by an
RIA's or ERA's board of directors or trustees.\281\ FinCEN estimates
that it will take approximately 4 hours for a trustee or director to
review and approve a written AML/CFT program the first year it is
implemented and approximately 2 hours each subsequent year to review
the program.\282\ For this activity, FinCEN uses an average hourly wage
based on the minimum BLS estimate for a chief executive as a proxy for
a trustee of director's hourly compensation. Therefore, using the fully
loaded labor cost of $172.42 per hour, the estimated labor cost for
program review and approval is approximately $690 for a new AML/CFT
program and $345 for an existing AML/CFT program. FinCEN seeks comment
on the accuracy of this estimation. This represents an upfront and
recurring cost for RIAs and ERAs that do not have an existing AML/CFT
program, but only a one-time cost for RIAs and ERAs that currently have
a significant or moderate number of AML/CFT measures in place.
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\281\ If an RIA or ERA does not have a board, then the program
must be approved by the adviser's sole proprietor, general partner,
trustee, or other persons that have functions similar to a board of
directors.
\282\ FinCEN notes that this estimate reflects the time spent by
one trustee/director, and that for those RIAs or ERAs with a full
board of directors, there could be incremental cost for each
additional director.
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Further, RIAs and ERAs would need to implement an AML/CFT training
program for employees.\283\ FinCEN estimates approximately two-thirds
of employees would need to be trained on the AML/CFT program
requirements, and assumes that such training could occur annually.\284\
FinCEN assesses that RIAs and ERAs with a significant or moderate
number of AML/CFT measures in place are already training staff and
would not incur additional training costs under the proposed rule--with
the exception of reviewing and updating the training materials to
ensure they cover all of the proposed requirements. For RIAs and ERAs
with a limited number of AML/CFT measures in place, FinCEN estimates it
would initially take 50 hours to develop an AML/CFT training program.
For entities that have an existing AML/CFT training program (those
entities with a significant or moderate number of AML/CFT measures in
place), FinCEN estimates the one-time burden to review and update
training materials would be 10 hours. FinCEN seeks comment on these
assumptions. Some RIAs and ERAs may choose to use a third-party
consultant or external training event to conduct trainings, but this
would not be required under the proposed rule.\285\ FinCEN estimates
the training would take approximately 1 hour for each employee,
assuming such training occurs annually.\286\ Table 4.5 reports the
estimated average cost of developing and conducting AML/CFT program
compliance training annually. The number of total hours is estimated
based on the average number of employees for each type of RIA or ERA.
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\283\ Employees of an investment adviser (and of any agent or
third-party service provider that is charged with administering any
portion of the AML/CFT program) would have to be trained in AML/CFT
requirements relevant to their functions and to recognize possible
signs of money laundering, terrorist financing, or other illicit
finance activity that could arise in the course of their duties.
\284\ The frequency of the investment adviser's training program
would be determined by the responsibilities of the employees and the
extent to which their functions would bring them in contact with
AML/CFT requirements or possible money laundering, terrorist
financing, or other illicit finance activity.
\285\ The 2020 GAO BSA Report estimated the average cost per
employee trained ranged between $20 and $400 with a mean estimate of
approximately $116 per employee (measured in 2022 dollars). For
``Large Community Bank B'' the average estimated cost per employee
trained was approximately $130 (measured in 2022 dollars).
\286\ See id. at p. 52.
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[[Page 12154]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.031
In addition, all RIAs and ERAs will need to implement independent
testing of their AML/CFT program. As described in the previous section,
FinCEN estimates the average cost of such testing will be approximately
$17,000.\288\ FinCEN seeks comment on this assumption. This reflects a
new recurring cost for all RIAs and ERAs affected by the proposed rule
with the exception of dually registered entities, which are assumed to
already use independent auditors. Table 4.6 summarizes the average
incremental costs per entity of developing or maintaining and updating
an AML/CFT program by type and characteristics of each RIA or ERA.
---------------------------------------------------------------------------
\287\ For annual training, total hours includes 1 hour per
employee. FinCEN assumes approximately two-thirds of employees will
require training each year, to include periodic updates and
refresher training. Total cost may differ from hourly cost
multiplied by total hours shown in table due to rounding.
\288\ See 2020 GAO BSA Report at Table 113.
[GRAPHIC] [TIFF OMITTED] TP15FE24.032
ii. Customer Due Diligence Costs
---------------------------------------------------------------------------
\289\ Costs are rounded to the nearest thousand dollars.
---------------------------------------------------------------------------
The proposed rule would require RIAs and ERAs to implement
appropriate risk-based procedures for conducting ongoing customer due
diligence. Specifically, RIAs and ERAs would be required to (1)
understand the nature and purpose of customer relationships for the
purpose of
[[Page 12155]]
developing a customer risk profile; and (2) conduct ongoing monitoring
to identify and report suspicious transactions and, on a risk basis, to
maintain and update customer information.
FinCEN assumes that all RIAs and ERAs have some existing
information on their customers and processes to identify and conduct
additional diligence on certain customers. For instance, in reviewing
the data from the 2016 IMCTS Survey, in addition to the 40 percent who
had implemented a full AML/CFT program consistent with the requirements
of the Second Proposed Investment Adviser Rule, an additional 36
percent of RIAs implemented some AML/CFT measures.\290\ Based on this
information as well as industry input about some of the voluntary AML/
CFT measures firms have in place, it is more common for firms to
develop voluntary CDD programs as part of their onboarding process as
compared to other AML/CFT measures.\291\ Therefore, FinCEN assumes that
any RIAs and ERAs with a moderate number of AML/CFT measures in place
will likely not need to modify their existing ongoing CDD measures,
while RIAs and ERAs with a limited number of AML/CFT measures in place
will need to perform additional customer review for existing customers
and at the time of account opening for new customers. Since investment
advisers generally already collect some of this information, the
estimated cost burden is less than implementing a fully comprehensive
customer review at the time of account opening, and accounts primarily
for the costs of modifying existing procedures. FinCEN assumes the cost
of modifying existing CDD procedures will be approximately 25 percent
of the full cost for initial customer review and risk profiling. FinCEN
seeks comment on these assumptions.
---------------------------------------------------------------------------
\290\ See 2016 IMCTS Survey, Question 15, supra n. 150
\291\ See, e.g., Managed Funds Association, Sound Practices for
Hedge Fund Managers (2009), Chapter 6 (Anti-Money Laundering).
---------------------------------------------------------------------------
RIAs and ERAs with a limited number of AML/CFT measures in place
will need to collect additional information to develop a customer risk
profile for legal entities and PIVs. Table 4.7 documents key
assumptions regarding the number of customer accounts at affiliated and
other RIAs and ERAs. ERAs only have legal entity customers--therefore,
they have no natural person customers. Based on an analysis of Form ADV
Filings, as of July 2023, RIAs had approximately 51.7 million natural
person customers, 2.8 million legal entity customers, and 100,000 PIV
accounts. FinCEN estimates the average number of customer accounts will
grow at an annual rate of 9.5 percent--and PIV accounts will grow at an
annual rate of 6 percent--based on average industry growth in
individual and PIV accounts from 2018 to 2023.\292\
---------------------------------------------------------------------------
\292\ See Investment Adviser Association, Investment Adviser
Industry Snapshot 2023 (Jul. 2023), p. 26, https://investmentadviser.org/wp-content/uploads/2023/06/Snapshot2023_Final.pdf.
[GRAPHIC] [TIFF OMITTED] TP15FE24.033
Affiliated and other RIAs and ERAs with a limited number of
existing AML/CFT measures will also need to collect and review customer
information to implement risk-based procedures for conducting ongoing
CDD. As described above, FinCEN estimates the costs associated with
modifying existing customer diligence information and procedures will
be significantly less than the full cost for developing the initial
customer risk profile. In this Impact Analysis, FinCEN estimates the
average cost of collecting additional information for new accounts to
develop a customer risk profile will be approximately 25 percent of the
total estimated cost of this information collection (30 minutes per
natural person or 1 hour per legal entity).\294\ Thus, the estimated
cost of information collection is approximately 7.5 minutes per natural
person or 15 minutes per legal entity. For this activity, FinCEN uses
an average hourly labor cost of $34.76 for a new account clerk.
Therefore, the estimated labor cost to develop a risk profile is
approximately $4.34 for per natural person and $8.68 per legal entity.
In addition to new accounts, FinCEN anticipates that RIAs and ERAs will
need to conduct this information collection for existing accounts.
FinCEN estimates this information collection for existing accounts will
be conducted over the first three years after the promulgation of the
proposed regulation.\295\ FinCEN seeks comment on the accuracy of this
estimate. The costs to build and maintain technology and information
systems to house this customer information is not reflected here but is
included in the annual costs of software licensing described elsewhere
in this Impact Analysis. These costs are multiplied by the average
number of natural persons, legal entities, and PIV accounts,
respectively, for each RIA and ERA.
---------------------------------------------------------------------------
\293\ See supra n. 26.
\294\ See 81 FR at 29448.
\295\ Current industry practices suggest customers are often re-
rated for risk purposes. Industry input suggests high-risk
customers, which make up a small portion of many RIAs customer base,
are re-rated at least annually or when SARs are filed, while medium-
or low-risk customers are re-rated less frequently.
---------------------------------------------------------------------------
In addition to the costs to the adviser, this requirement likely
represents an information collection burden for legal entities that
hold accounts with investment advisers. FinCEN estimates it would take
between approximately 15 and 30 minutes, or an average of 22.5 minutes,
for legal entity customers to provide any additional data required for
this information collection. Since these
[[Page 12156]]
customers are not employees of the regulated entities, but rather other
investment advisers in most cases, FinCEN uses an hourly burden
estimate of $49.17 that is representative of the customer base.\296\
Therefore, the average information collection cost is approximately
$18.44 per customer. This average cost is multiplied by the number of
legal entity customers for each RIA or ERA.
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\296\ This estimate is based on a population-weighted average of
$32.79, which represents the median salary for all employees in
NAICS 522, 523, and 525, multiplied by an adjustment factor for
fringe benefits of 1.50.
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Table 4.8 summarizes the average ongoing CDD costs per entity by
type and characteristics of each RIA or ERA. The relatively higher
costs in the first three years reflects the compliance burden
associated with data collection activities to develop a customer risk
profile for existing customer accounts and new customer accounts, while
the ongoing costs after 2026 reflect the burden associated with data
collection for only new customer accounts.
[GRAPHIC] [TIFF OMITTED] TP15FE24.034
iii. Suspicious Activity Report Filing Costs
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\297\ This category includes dual registrants that are applying
a significant number of AML/CFT measures and affiliated advisers
that are applying a moderate number of AML/CFT measures.
\298\ Costs are rounded to the nearest thousand dollars for RIAs
and to the nearest hundred dollars for ERAs.
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As part of their AML/CFT program, RIAs and ERAs will be required to
conduct ongoing monitoring of customers and file SARs. FinCEN assumes
that RIAs and ERAs that are dually registered as a broker-dealer or
bank are already submitting SARs. The extent of SAR filing by
affiliated or other advisers is uncertain. Therefore, FinCEN assumes
that all RIAs and ERAs that are not dually registered as a broker-
dealer or bank would have to begin filing SARs due to the proposed
regulation. FinCEN seeks comment on this assumption. To the extent that
some RIAs and ERAs in this category are already filing SARs, this may
overestimate the costs of the proposed regulation.
Based on an analysis of SAR filings by dual registrants between
2018 and 2022, FinCEN estimates that RIAs will file an average of
approximately 60 SARs per year.\299\ Since no information was available
for ERAs, FinCEN applies the same estimate of 60 SARs per year. FinCEN
seeks comment on this assumption. Based on the analysis, FinCEN
estimates the following regarding the SARs investment advisers would
file:
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\299\ Dual registrants were assessed to be the population of
investment advisers most likely to file SARs and best represent an
investment adviser subject to SAR filing obligations.
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51 (85 percent) would be initial SARs and 9 (15 percent)
would be continuing SARs.
51 (85 percent) would be discrete SARs and 9 (15 percent)
would be batch SARs.
55 (92 percent) would be standard SARs and 5 (8 percent)
would be extended SARs.
Without a detailed breakdown, FinCEN assumes the distribution of
SARs is proportionally distributed across each category as discussed
below. Each type of filing is expected to have a different reporting
burden.
In addition, the estimated costs of ongoing monitoring in (Table
4.8 above) include the review of alerts that do not result in a SAR
being filed. FinCEN previously estimated that approximately 42 percent
of suspicious activity alerts were turned into SARs.\300\ Therefore,
for each case filed as a SAR, approximately 1.4 cases were not filed.
Table 4.9 reports the average cost of determining whether a SAR is
needed and filing SARs. While the burden estimates are based on
FinCEN's previous analysis,\301\ in this Impact Analysis the burden is
attributed primarily to a compliance officer rather than a financial
clerk or teller due to the smaller size of RIAs and ERAs relative to
banks and to avoid potentially underestimating the average hourly labor
costs associated with these activities. To the extent that a portion of
this work can be completed by clerical staff that report to a
compliance officer, this may slightly overestimate certain costs.
FinCEN seeks comment on this assumption. The licensing cost for
transaction monitoring software is not reflected here but is included
in the software costs described elsewhere in this Impact Analysis.
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\300\ See FinCEN, Proposed Renewal: Reports by Financial
Institutions of Suspicious Transactions, 85 FR 31598 (May 26, 2020).
\301\ See id.
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[[Page 12157]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.035
Figure 4.1 illustrates FinCEN's estimates regarding the average
number and distribution of SARs, including for suspicious activity
alerts that do not result in a SAR being filed, as well as the hourly
recordkeeping, reporting, and storing burden estimates by type of
filing.
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\302\ Information on the number and distribution of SARs by type
of filing based on an analysis of SAR filings. Information on the
number of alerts and burden estimates based on FinCEN, Proposed
Renewal: Reports by Financial Institutions of Suspicious
Transactions. 85 FR 31598 (May 26, 2020).
[GRAPHIC] [TIFF OMITTED] TP15FE24.036
Based on this information, the average annual cost of SAR filings
is estimated to be approximately $10,000 per entity for any RIA or ERA
that does not have a full AML/CFT program in place. No incremental
costs are estimated for dual registrants because those entities are
already submitting SARs in the baseline.
[[Page 12158]]
iv. Other Compliance Costs
As discussed above, there are certain costs associated with the
proposed rule that may be spread across several of the proposed
requirements. It is challenging to allocate those expenditures to
specific provisions of the proposed rule described above. These include
software licensing and general recordkeeping costs.
Dual registrants, affiliated, and other RIAs and ERAs that already
apply a significant or moderate number of AML/CFT measures are expected
to already be using specialized AML/CFT software as part of their AML/
CFT program. Affiliated or non-affiliated entities that have a limited
number of AML/CFT measures in place will likely have to invest in this
type of software to implement an AML/CFT program. FinCEN estimates that
annual licensing fees for specialized AML/CFT software will be
approximately $12,400.\303\
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\303\ See 2020 GAO BSA Report at Table 113.
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The proposed rule requires RIAs and ERAs to comply with certain
recordkeeping obligations (under the Recordkeeping Rule and Travel
Rule),\304\ including recording and maintaining originator and
beneficiary information for certain transactions. FinCEN assumes that
RIAs and ERAs that are dually registered as a broker-dealer or as a
bank with a significant number of AML/CFT measures in place are already
in compliance with the recordkeeping requirements, while other RIAs and
ERAs would have to take additional steps to comply with these measures.
FinCEN estimates the annual recordkeeping burden per RIA or ERA for
these requirements is 50 hours.\305\ Table 4.10 summarizes the average
cost associated with these recordkeeping requirements.
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\304\ See 31 CFR 1020.410(a), (e); see also 31 CFR 1010.410(f).
\305\ FinCEN, Proposed Renewal: Renewal Without Change of
Regulations Requiring Records to be Made and Retained by Financial
Institutions, Banks, and Providers and Sellers of Prepaid Access, 85
FR 84105 (Dec. 23, 2020).
[GRAPHIC] [TIFF OMITTED] TP15FE24.037
In addition, the proposed rule requires RIAs and ERAs to implement
the information sharing procedures contained in section 314(a) of the
USA PATRIOT Act.\306\ Upon receiving an information request from
FinCEN, an RIA or ERA would be required to search its records to
determine whether it maintains or has maintained any account or engaged
in any transaction with an individual, entity, or organization named in
the request. Covered financial institutions are instructed not to reply
to the 314(a) request if a search does not uncover any matching of
accounts or transactions. Currently, all 314(a) responses are filed
using automated technology.\307\ FinCEN assumes that dually registered
entities with a significant number of AML/CFT measures in place are
already complying with these requirements, while most other RIAs and
ERAs will likely incur additional reporting costs to comply with these
measures. FinCEN estimates the average burden will be approximately 4
minutes per 314(a) request for 365 reports per year per investment
adviser, an average of one request per calendar day.\308\ Therefore,
the estimated burden is approximately 24 hours (4 minutes x 365 reports
= 1,460 minutes) per year per investment adviser. The information
technology costs associated with 314(a) requests are assumed to be
included within the overall software costs. Table 4.11 summarizes the
information collection costs for 314(a) measures.
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\306\ FinCEN, Special Information Sharing Procedures to Deter
Money Laundering and Terrorist Activity, Final Rule, 67 FR 60579
(Sept. 26, 2002).
\307\ FinCEN, Proposed Renewal: Renewal Without Change on
Information Sharing Between Government Agencies and Financial
Institutions, 87 FR 41186 (Jul. 11, 2022).
\308\ Id.
[GRAPHIC] [TIFF OMITTED] TP15FE24.038
As ``covered financial institutions'' under FinCEN regulations,
RIAs and ERAs will also be required to maintain due diligence measures
that include policies, procedures, and controls that are reasonably
designed to detect and report any known or suspected money laundering
or other suspicious activity conducted through or involving any
correspondent or private banking account that is established,
maintained, administered, or managed in the United States. FinCEN
estimates the annual hourly burden of maintaining and updating the due
diligence program for foreign correspondent accounts and private
banking accounts would be approximately two hours for each RIA and
ERA--one hour to maintain and update the program and one hour to obtain
the approval of senior management.\309\ Information technology costs
associated with this requirement are included within the overall
software costs. Table 4.12 summarizes the cost burden associated with
special due diligence measures.
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\309\ FinCEN, Proposed Renewal: Due Diligence Programs for
Correspondent Accounts for Foreign Financial Institutions and for
Private Banking Accounts, 85 FR 61104 (Sep. 9, 2020).
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[[Page 12159]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.039
Under the proposed rule, RIAs and ERAs must also comply with
special measures procedures and prohibitions contained in section 311
of the USA PATRIOT Act.\310\ Section 9714 of the Combatting Russian
Money Laundering Act allows for similar special measures in the context
of illicit Russian finance. Sections 311 and 9714 grant FinCEN the
authority, upon finding that reasonable grounds exist for concluding
that a foreign jurisdiction, financial institution, class of
transactions, or type of account is of ``primary money laundering
concern,'' to require domestic financial institutions and financial
agencies to take one or more ``special measures,'' which impose
additional recordkeeping, information collection, and reporting
requirements on covered U.S. financial institutions. They also allow
FinCEN to impose prohibitions or conditions on the opening or
maintenance of certain correspondent accounts. Currently, such
prohibitions are in place for three foreign financial institutions and
two foreign jurisdictions, all imposed under section 311.\311\ These
special measures require financial institutions to provide notice to
foreign account holders and document compliance with the statute.
FinCEN assumes that dually registered RIAs and ERAs with a significant
number of AML/CFT measures in place are already complying with these
requirements, while most other RIAs and ERAs will likely incur
additional costs to comply with these special measures. FinCEN
estimates the average burden will be approximately 1 hour per special
measure.\312\ Therefore, the estimated burden is approximately 5 hours.
FinCEN seeks comment on this assumption. Table 4.13 summarizes the
average cost for implementation section 311 special measures.
---------------------------------------------------------------------------
\310\ FinCEN, Final Rule: Special Information Sharing Procedures
to Deter Money Laundering and Terrorist Activity. 67 FR 60579 (Sept.
26, 2002).
\311\ These foreign financial institutions and jurisdictions
are: (1) Bank of Dandong, (2) Commercial Bank of Syria, including
Syrian Lebanese Commercial Bank, (3) FBME Bank Ltd., (4) Islamic
Republic of Iran, and (5) Democratic People's Republic of North
Korea. See FinCEN, Special Measures for Jurisdictions, Financial
Institutions, or International Transactions of Primary Money
Laundering Concern, https://www.fincen.gov/resources/statutes-and-regulations/311-and-9714-special-measures,
\312\ See, e.g., FinCEN, Proposed Renewal: Imposition of a
Special Measure against Bank of Dandong as a Financial Institution
of Primary Money Laundering Concern, 88 FR 48285 (Jul. 26, 2023).
[GRAPHIC] [TIFF OMITTED] TP15FE24.040
Finally, in addition to filing SARs, financial institutions must
file CTRs under the BSA's reporting obligations. Currently, all
investment advisers are required to report transactions in currency
over $10,000 on Form 8300, which is being replaced by the CTR.\313\
Therefore, FinCEN estimates that the incremental cost for RIAs and ERAs
to use the CTR is de minimis.\314\ FinCEN seeks comment on this
assumption.
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\313\ FinCEN, Proposed Renewal: Renewal Without Change of the
Bank Secrecy Act Reports of Transactions in Currency Regulations at
31 CFR 1010.310 Through 1010.314, 31 CFR 1021.311, and 31 CFR
1021.313, and FinCEN Report 112--Currency Transaction Report, 85 FR
29022 (July 13, 2020).
\314\ In the Second Proposed Investment Adviser Rule, FinCEN
estimated each investment adviser would file an average of one CTR
per year, at a time cost of one hour per CTR. Incorporating these
costs in the model would change the total hour and dollar burden by
less than one percent.
---------------------------------------------------------------------------
Based on this information, the average annual cost of other
compliance measures not characterized elsewhere in this regulatory
impact analysis are estimated to be approximately $4,000 for affiliated
or other RIAs and ERAs with a moderate number of AML/CFT measures
already in place and approximately $16,000 for affiliated or other RIAs
and ERAs with a limited number of AML/CFT measures already in place.
(c) Costs to Government
This section describes the costs to Federal Government agencies to
implement and enforce the proposed regulation.
i. Costs to FinCEN
Administering the proposed regulation is estimated to entail costs
to FinCEN as well as other government agencies. In terms of technology
and IT costs, the proposed rule does not create new kinds or
requirements or new reporting forms, and instead applies existing SAR
and CTR filing obligations to investment advisers. As a result,
technology and IT costs are estimated to be small but are included in
this analysis for comprehensiveness. The primary costs that FinCEN and
other government agencies are expected to incur with respect to
administering this proposed rule relate to personnel costs for
enforcing compliance with the regulation, as well as providing guidance
and engaging in outreach, training, investigations, and policy
development in support of this regulation. FinCEN estimates the total
annual personnel cost relating to administering this proposed rule to
be
[[Page 12160]]
$7.5 million, as reflected in Table 4.14, with continuing recurring
annual costs of roughly the same magnitude for ongoing outreach,
policy, and enforcement activities thereafter.
[GRAPHIC] [TIFF OMITTED] TP15FE24.041
In addition, FinCEN estimates the average technology and IT costs
associated with receiving SAR filings will be approximately $0.10 per
SAR. Based on an average estimate of 60 SARs per entity per year,
FinCEN anticipates it will receive approximately 1,245,420 SARs each
year from RIAs and ERAs that do not currently have most AML/CFT
measures in place. This estimate excludes SAR filings for dually
registered entities because those entities are expected to be
submitting SARs in the baseline. Therefore, the incremental technology
and IT costs to FinCEN associated with the SAR filing requirement are
estimated to be approximately $125,000 per year. Enforcement of this
regulation will involve coordination with law enforcement agencies,
which will incur costs (time and resources) while conducting
investigations into non-compliance. FinCEN does not currently propose
an estimate of these costs.
---------------------------------------------------------------------------
\315\ U.S. Office of Personnel Management, Salary Table 2023
Incorporating the 4.1 percent General Schedule Increase and a
Locality Payment of 32.49 percent for the Washington-Baltimore-
Arlington area. Rounded to three significant digits.
\316\ The Department of Health and Human Services recommends
using an adjustment factor of 2 to account for fringe benefits and
overhead when agency-specific financial data are unavailable. (HHS,
Guidelines for Regulatory Impact Analysis, 2016, p. 30).
---------------------------------------------------------------------------
ii. Costs to SEC
The SEC is also estimated to incur costs, primarily relating to
additional staff needed to examine for compliance with the requirements
of the proposed rule, and to provide any needed regulatory guidance or
analysis. Costs associated with implementing the proposed rule are
expected to primarily affect the Division of Investment Management and
the Division of Examinations, though certain potential costs may also
be incurred by the Division of Enforcement. In addition, as the SEC
receives a significant portion of its revenue from fees on registrants
and other market participants, many of these costs would ultimately be
paid for through those fees.\317\
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\317\ See SEC, FY 2023 Agency Financial Report, p. 32, https://www.sec.gov/files/sec-2023-agency-financial-report.pdf#chairmessage.
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The SEC's Division of Investment Management administers the
Advisers Act and develops regulatory policy for investment advisers,
among other responsibilities. The Division of Investment Management may
require two additional staff to provide regulatory guidance or analysis
related to the proposed rule. The average salary for a GS-15 equivalent
is approximately $203,500 based on the SEC's SK series adjusted for the
locality pay area of Washington, DC.\318\ Applying an adjustment factor
of 2.0 for fringe benefits and overhead yields an estimated fully
loaded labor cost of approximately $407,000. Therefore, FinCEN
estimates the total annual personnel cost to the SEC relating to
administering this proposed rule to be approximately $814,000.
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\318\ This estimate is based on the midpoint salary for a GS-15
equivalent of $153,600 multiplied by the locality pay rate of 32.49
percent for Washington, DC.
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RIAs are subject to examination by SEC staff in the SEC's Division
of Examinations. Within the Division of Examinations, the Investment
Adviser/Investment Company (IA/IC) Examination Program completed more
than 2,300 examinations of SEC-registered investment advisers in
FY22.\319\ The SEC maintains authority to examine ERAs as well. While
the Division of Examinations may conduct examinations for compliance
with the requirements of the proposed rule within its existing
examination program, this may require additional examination staff.
FinCEN does not currently have an estimate of the additional costs the
SEC's Division of Examinations may incur for these activities.
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\319\ See SEC, FY 2024 Congressional Budget Justification, p.
22, https://www.sec.gov/files/fy-2024-congressional-budget-justification_final-3-10.pdf.
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(d) Summary of Costs
This section reports the total costs of the proposed rule on a per
entity basis
[[Page 12161]]
and in aggregate, by type and characteristics of each RIA or ERA. As
described in ection 2, the regulated universe consists of RIAs and ERAs
that vary in terms of business structure, number of employees, number
of accounts, and the extent that existing AML/CFT measures are being
applied (e.g. significant, moderate, limited). Table 4.15 summarizes
the total number of entities by type and characteristics of each RIA
and ERA.
[GRAPHIC] [TIFF OMITTED] TP15FE24.042
i. Average Cost per Private Entity and Total Costs by Category of
Investment Adviser
This section describes the estimated average cost per entity and
total costs by type and characteristics of each RIA and ERA. The
average costs per RIA and ERA are multiplied by the number of impacted
entities to estimate the aggregate cost burden of the proposed rule, by
category of RIA and ERA. Table 4.16 summarizes the estimated costs for
RIAs and ERAs that are dually registered as a broker-dealer or a bank
with a significant number of AML/CFT measures in place. The estimated
costs for dually registered entities are minimal because most firms are
expected to have an existing AML/CFT program in place. The relatively
small incremental costs are associated with RIAs and ERAs maintaining
and updating a written AML/CFT program and reviewing and updating AML/
CFT training to ensure they cover the activities of all RIAs and ERAs
and meet the requirements of the BSA.
[GRAPHIC] [TIFF OMITTED] TP15FE24.043
Table 4.17. summarizes the estimated costs for affiliated RIAs with
a moderate number of AML/CFT measures in place.
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\320\ For Tables 4.16 to 4.37, costs are rounded to the nearest
thousand dollars or two significant digits.
[GRAPHIC] [TIFF OMITTED] TP15FE24.044
Table 4.18. summarizes the estimated costs for affiliated RIAs with
a limited number of AML/CFT measures in place.
[[Page 12162]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.045
Table 4.19. summarizes the estimated costs for other RIAs with a
moderate number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TP15FE24.046
Table 4.20. summarizes the estimated costs for other RIAs with a
limited number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TP15FE24.047
Table 4.21. summarizes the estimated costs for ERAs, affiliated,
with a moderate number of AML/CFT measures in place.
[[Page 12163]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.048
Table 4.22. summarizes the estimated costs for ERAs that are
affiliated with a bank or broker-dealer with a moderate number of AML/
CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TP15FE24.049
Table 4.23. summarizes the estimated costs for other ERAs with a
moderate number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TP15FE24.050
Table 4.24. summarizes the estimated costs for other ERAs with a
limited number of AML/CFT measures in place.
[GRAPHIC] [TIFF OMITTED] TP15FE24.051
ii. Estimated Burden of the Proposed Rule to Industry
Table 4.25 summarizes the total costs of the proposed rule on an
undiscounted basis.
[[Page 12164]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.052
Table 4.26 summarizes the total costs of the proposed rule by
entity and business structure for dual registrants, affiliated
advisers, and other advisers on an undiscounted basis.
[GRAPHIC] [TIFF OMITTED] TP15FE24.053
iii. Discounted Estimated Burden of the Proposed Rule
In regulatory impact analyses, discount rates are used to account
for differences in the timing of the estimated benefits and costs.
Benefits and costs that accrue further in the future are more heavily
discounted than those impacts that occur today. Discounting reflects
individuals' general preference to receive benefits sooner rather than
later (and defer costs) and recognizes that costs incurred today are
more expensive than future costs because businesses must forgo an
expected rate of return on investment of that capital.\321\ OMB
recommends using a discount rate of 2 percent.\322\ This represents the
real (inflation-adjusted) rate of return on long-term U.S. government
debt over the last 30 years, calculated between 1993 and 2022, and is a
reasonable approximation of the social rate of time preference.
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\321\ U.S. Office of Management and Budget, Circular A-4, Nov.
9, 2023.
\322\ Id.
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Table 4.27 summarizes the total costs of the proposed rule using a
2 percent discount rate. As shown in the table, RIAs account for
approximately 72 percent of the annualized costs to industry, while
ERAs account for the remaining 28 percent.
[[Page 12165]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.054
Table 4.28 summarizes the total costs of the proposed rule by
entity and business structure for dual registrants, affiliated
advisers, and other advisers using a 2 percent discount rate. As shown
in the table, entities that are dual registrants account for less than
0.1 percent, affiliated advisers account for approximately 11 percent,
and other advisers account for approximately 89 percent of the
annualized costs to industry.
[GRAPHIC] [TIFF OMITTED] TP15FE24.055
(e) Uncertainty Analysis
As described in section 2, the number of RIAs and ERAs is well-
defined based on the number of Form ADV filings. However, there is
uncertainty about the extent of existing AML/CFT measures within each
group. While an uncertainty analysis could layer various assumptions
about the percentage of RIAs and ERAs that have in place certain AML/
CFT measures to address each individual requirement--and the degree to
which those measures would have to be reviewed and modified to comply
with the requirements of the proposed rule--such information is
unavailable and the existing framework described in the section
presents a simpler approach to account for this uncertainty by varying
certain
[[Page 12166]]
assumptions around the categorization of RIAs and ERAs. Specifically,
this Impact Analysis estimates the impact of varying assumptions
regarding the distribution of RIAs and ERAs into categories of
significant, moderate, and limited AML/CFT measures in place. This
provides a lower and upper bound estimate of the potential costs of the
proposed rule. The costs presented earlier in this section represent
FinCEN's primary estimate of the burden of the proposed rule.
i. Lower Bound Estimate
The lower bound estimate assumes that a greater proportion of RIAs
and ERAs have a significant or moderate number of AML/CFT measures in
place and will have to implement relatively fewer additional measures
under the proposed rule. Table 4.29 summarizes the total number of
entities according to the business type and characteristics of each RIA
and ERA. This represents an optimistic, but not implausible, scenario
based on self-reported assessments indicating that approximately 40
percent of RIAs already have AML/CFT policies and procedures consistent
with the BSA.\323\ For the lower bound estimate, FinCEN assumes the
same proportion of affiliated ERAs and other ERAs have a significant
number of AML/CFT measures as the corresponding RIA groups. Thus, this
estimate is optimistic in that the number of ERAs with policies and
procedures similar to those of RIAs is highly uncertain--although it is
still likely to be less than the overall percentage of RIAs.
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\323\ See 2106 IMCTS Survey, supra n. 150.
[GRAPHIC] [TIFF OMITTED] TP15FE24.056
Table 4.30 summarizes the total costs of the proposed rule in the
lower bound scenario using a 2 percent discount rate. As shown in the
table, although the overall costs of the proposed rule are lower, the
distribution of costs between RIAs and ERAs is similar to the primary
estimate.
[GRAPHIC] [TIFF OMITTED] TP15FE24.057
Table 4.31 summarizes the total costs of the proposed rule by
entity and business structure for dual registrants, affiliated
advisers, and other advisers in the lower bound scenario using a 2
percent discount rate. As shown in the
[[Page 12167]]
table, in the lower bound scenario a greater proportion of the costs
(approximately 95 percent) are attributed to other advisers.
[GRAPHIC] [TIFF OMITTED] TP15FE24.058
ii. Upper Bound Estimate
The upper bound estimate assumes that a greater proportion of RIAs
and ERAs have limited number of AML/CFT measures in place and will have
to implement relatively greater additional measures under the proposed
rule. Table 4.32 summarizes the total number of entities by type and
characteristics of each RIA and ERA.
[GRAPHIC] [TIFF OMITTED] TP15FE24.059
Table 4.33 summarizes the total costs of the proposed rule in the
upper bound scenario using a 2 percent discount rate. As shown in the
table, although the overall costs of the proposed rule are higher, the
distribution of costs between RIAs and ERAs is similar to the primary
estimate.
[[Page 12168]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.060
Table 4.34 summarizes the total costs of the proposed rule by
entity and business structure for dual registrants, affiliated
advisers, and other advisers in the upper bound scenario using a 2
percent discount rate. As shown in the table, although the overall
costs of the proposed rule are higher, the distribution of costs
between the different types of RIAs and ERAs is similar to the primary
estimate.
[GRAPHIC] [TIFF OMITTED] TP15FE24.061
iii. Comparison of Costs in the Lower and Upper Bound Estimates
As described in this section, FinCEN estimates the cost of the
proposed rule to regulated entities will be approximately $870 million
on an annualized basis. In comparison to alternative assumptions about
the degree of existing AML/CFT measures among RIAs and ERAs subject to
the proposed rule, FinCEN's primary estimate is relatively conservative
in that it assumes a greater proportion of RIAs and ERAs have only a
moderate or limited number of existing AML/CFT measures in place in
comparison to input provided by industry suggesting that figure may be
lower. Therefore, the primary estimate is closer to the upper bound
than the lower bound. Under the
[[Page 12169]]
most pessimistic assumptions regarding the degree of existing AML/CFT
measures, the proposed rule is estimated to cost approximately $1
billion on an annualized basis. This scenario is highly improbable
because more than 520 RIAs (out of 690 surveyed) indicated that they
already have a significant or moderate number of AML/CFT measures in
place. Under more optimistic assumptions about the proportion of RIAs
with a significant or moderate number of AML/CFT measures in place,
FinCEN estimates the cost of the proposed rule will be approximately
$490 million on an annualized basis. Table 4.35 provides a comparison
of the estimated costs of the proposed rule under each of these
scenarios.
[GRAPHIC] [TIFF OMITTED] TP15FE24.062
iv. Alternative Higher Third Party Vendor Cost Scenario
While the estimated costs of the proposed rule are not highly
sensitive to several of the unit cost assumptions described in this
section--in part because most of the labor costs are generally
estimated in hours rather than days or weeks--two of the major cost
drivers of the proposed rule are software licensing fees and
independent testing. Therefore, FinCEN compared how the estimated costs
changed if third-party vendor costs increased by 100 percent.\324\ The
estimated costs are relatively sensitive to assumptions regarding
third-party fees for certain AML/CFT functions because these comprise a
large share of the overall costs for RIAs and ERAs with a moderate or
limited number of existing AML/CFT measures in place. Table 4.36
reports alternative cost assumptions for third-party vendor costs that
are double the primary estimate.\325\ FinCEN assessed that the average
technology costs used in the primary estimate are more likely to be
representative of the costs likely to be incurred by RIAs and ERAs,
which are typically much smaller than the bank benchmark in the 2020
GAO BSA Report. Smaller banks generally reported lower technology
costs. However, for direct comparison this regulatory impact analysis
reports higher estimated technology costs as an alternative scenario.
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\324\ Independent testing under the proposed rule can be
conducted by an adviser's employees and is not required to be
conducted by a third-party vendor. The costs identified here could
be less than estimated to the extent employees (and not third-party
vendors) are used.
\325\ The alternative third party vendor costs are more in line
with the cost estimates in the 2020 GAO BSA Report for ``Large
Community Bank A'' ($501 million to $600 million in assets) and
``Large Credit Union A'' ($101 million to $201 million in assets).
In comparison, the primary cost estimates are based on ``Large
Community Bank B'' ($401 million to $500 million in assets) in the
same report.
[GRAPHIC] [TIFF OMITTED] TP15FE24.063
[[Page 12170]]
Table 4.37 provides a comparison of the estimated costs of the
proposed rule under the higher technology cost scenario. Overall, the
estimated costs would be approximately 60 percent higher under this
scenario relative to the primary estimate. FinCEN ascribes a low
probability to the average technology/third-party vendor costs being
this high given the typical size of RIAs and ERAs affected by the
proposed rule.
[GRAPHIC] [TIFF OMITTED] TP15FE24.064
5. Regulatory Alternatives
This section evaluates the potential benefits and costs of
regulatory alternatives in comparison to the proposed regulation. This
regulatory impact analysis considers two alternatives as described
below.
(a) Alternative 1: Inclusion of State-Registered Investment Advisers
In the first alternative, FinCEN considered including State-
registered investment advisers in the proposed rule. This alternative
would bring all investment advisers that file Form ADV and register
with a Federal or State regulatory authority under the scope of the
proposed rule. FinCEN estimates there are approximately 17,000 State-
registered investment advisers, based on reports from the North
American Security Administrators Association (NASAA).\326\ Table 5.1
summarizes their characteristics.
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\326\ NASAA Investment Adviser Section: 2023 Annual Report, p.2,
https://www.nasaa.org/wp-content/uploads/2023/09/2023-IA-Section-Report-FINAL.pdf.
[GRAPHIC] [TIFF OMITTED] TP15FE24.065
FinCEN assumed that the costs of the rule would apply to State-
registered investment advisers in the same way as for RIAs that are
``other advisers''. If State-registered investment advisers are less
likely than RIAs to have any AML/CFT measures in the baseline, then
this assumption would understate the costs of the rule for State-
registered investment advisers. Under the assumptions of the cost model
in section 3, Table 5.2. summarizes the total costs of Alternative 1
for State-registered investment advisers in addition to the other
entities subject to regulation.
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\327\ See Id. The average number of employees per investment
adviser was calculated as a weighted average of the bins reported on
page 5, using the following employees for each respective bin: 2 [0-
2 employees], 6.5 [3-10 employees], 15 [11-20 employees], 25 [>20
employees].
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[[Page 12171]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.066
FinCEN assesses the potential benefits of including State-
registered investment advisers in the definition of ``financial
institution'' are significantly smaller relative to the likely benefits
of including RIAs and ERAs. Although the overall benefits may exceed
those of the proposed regulation because the requirements extend to a
larger number of entities, the limited incremental benefits of applying
the requirements to State-registered investment advisers suggest this
would be a less cost-effective approach to regulation.
Specifically, including State-registered investment advisers nearly
doubles the cost of the proposed rule, because of the large number of
State-registered investment advisers. But such inclusion is less likely
to achieve the same degree of benefits as for other investment
advisers, partly because State-registered advisers are smaller, in
terms of number of clients and AUM, and their customers tend to be
localized. Treasury's risk assessment found few examples of State-
registered investment advisers being used to move illicit proceeds or
facilitate other illicit activity.\328\ Further, the vast majority of
their clients are natural persons who are not high net-worth customers
and are U.S. persons.\329\ Therefore, FinCEN rejected this regulatory
alternative in favor of the more cost-effective approach in the
proposed regulation.
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\328\ See Treasury, Investment Adviser Illicit Finance Risk
Assessment, https://home.treasury.gov/system/files/136/US-Sectoral-Illicit-Finance-Risk-Assessment-Investment-Advisers.
\329\ A survey of select State securities regulators found that
for State-registered investment advisers they supervised, on
average, less than 3 percent of their customers were non-U.S.
persons.
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(b) Alternative 2: Requirements for Private Fund Advisers To Conduct
Risk-Based Customer Due Diligence and Amendments to Form PF for
Reporting Beneficial Ownership Information for the Private Funds Being
Advised
In the second alternative, FinCEN considered whether to limit the
rule requirements to only certain reporting requirements among private
fund advisers. In particular, the alternative rule would require
private fund advisers to conduct risk-based customer due diligence and
to report beneficial ownership information.
Under Alternative 2, investment advisers would incur compliance
costs associated with the following requirements: (1) identifying
beneficial ownership for new legal entity and PIV accounts and (2)
developing a customer risk profile for legal entities. Investment
advisers would be exempt from other requirements of the BSA, including
developing and maintaining an AML/CFT program, filing SARs, and other
recordkeeping requirements. Investment advisers that do not advise
private funds would also be exempt from any requirement. Alternative 2
would limit both the covered population and the number of requirements,
relative to the proposed rule. FinCEN estimates there are approximately
11,000 RIAs advising private funds, as well as all ERAs. Some RIAs and
ERAs already have measures in place that would meet the requirements of
Alternative 2.
FinCEN estimated the cost of Alternative 2 based on the same cost
methodology as in section 3, in this case only for investment advisers
that report private funds in Form ADV. As described in sections 2 and
3, FinCEN's cost analysis assumed that RIAs and ERAs with a significant
or moderate number of AML/CFT measures would already meet the
requirements of Alternative 2; those RIAs and ERAs would have zero cost
burden under this alternative. Therefore, the costs are borne only by
RIAs and ERAs with a limited number of AML/CFT measures in the
baseline. FinCEN used Form ADV data for those advisers that advise
private funds, and Table 5.3. summarizes the total costs of Alternative
2. For Alternative 2, there are no estimated Federal agency costs
attributed to the CDD requirement.
[[Page 12172]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.067
FinCEN rejected this regulatory alternative in favor of the
proposed regulation because, although it is a less costly rule, it is
less likely to provide a similar level of benefits and thus would not
achieve FinCEN's objectives in addressing the illicit finance risk for
investment advisers. The absence of mandatory SAR filing in this
regulatory alternative would limit the potential benefits to law
enforcement to investigate financial crimes and interagency cooperation
on national security threats and their associated financial activity.
Further, the lack of information sharing authorities would limit the
ability of law enforcement and other agencies, as well as other
financial institutions, to provide more specific information on illicit
finance threats. This alternative would also not be sufficient for the
U.S. to be in compliance with the international AML/CFT standards
established by the FATF.
(c) Comparison
Table 5.4 reports the costs for each of the regulatory alternatives
in comparison to the proposed regulation.
[GRAPHIC] [TIFF OMITTED] TP15FE24.068
Table 5.5 provides a detailed summary of the costs and benefits
associated with each regulatory alternative (annualized using a 2
percent discount rate over 10 years).
[[Page 12173]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.069
B. Regulatory Flexibility Analysis
The RFA \330\ requires an agency either to provide an initial
regulatory flexibility analysis (IRFA) with a proposed rule or certify
that the proposed rule would not have a significant economic impact on
a substantial number of small entities. This section, VII.B, contains
the IRFA prepared pursuant to the RFA. A final regulatory flexibility
analysis or certification that the proposed rule would not have a
significant economic impact on a substantial number of small entities
will be conducted after consideration of comments received during the
comment period.
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\330\ 5 U.S.C. 601 et seq.
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1. Statement of the Need for, and Objectives of, the Proposed Rule
As described above in section IV.A.1 and section VII.A.1, FinCEN is
proposing this rule to address identified illicit finance risks in the
investment adviser industry. FinCEN is proposing regulations to apply
AML/CFT program, recordkeeping and reporting requirements to RIAs and
ERAs.
2. Small Entities Affected by the Proposed Rule
FinCEN is proposing to define the term small entity in accordance
with the definition of ``small business'' or ``small organization''
under the Advisers Act rule adopted for purposes of the RFA, in lieu of
using the Small Business Administration's definition.\331\
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\331\ See 13 CFR 121.201.
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Relying on the SEC's definition, which it has adopted by
regulation, has the benefit of ensuring consistency in the
categorization of small entities for the SEC's purposes,\332\ as well
as providing the advisory industry with a uniform standard. Using the
SEC standard also allows FinCEN to use the most current and precise
data about investment advisers. Investment advisers must update Form
ADV,
[[Page 12174]]
including whether they qualify as a ``small entity,'' at least
annually. Because Form ADV information is individualized to each
investment adviser, FinCEN can identify the specific entities
qualifying as ``small entities'' under the SEC standard.
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\332\ As noted above, 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.
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In contrast, information on business revenue is derived from the
Economic Census, and the most recent Economic Census data reflect
business information for 2017. This data is not individualized to
specific firms and as detailed below, likely includes other firms that
are not covered by the proposed rule requiring FinCEN to make
additional assumptions. This data represents the average revenues of
all firms, not just RIAs and ERAs, with less than $50 million in annual
receipts rather than firms with assets under management of less than
$25 million. This is likely to be an underestimate because those firms
that are required to register with the SEC tend to be larger and many
of the firms reported in the SUSB, particularly State-registered
investment advisers, would not be subject to the proposed rule. Given
the data limitations, it is not feasible to directly estimate the
average annual revenues of investment advisers that fall under the
definition of ``small entity'' described above.
Further, using a standard tied to AUM is consistent with how
Congress (in the 2010 Dodd-Frank Act) and SEC regulations distinguish
between small, mid-sized, and large investment advisers and how other
regulatory requirements are applied to investment advisers.\333\ Using
this standard would also be consistent with the standard applied by
FinCEN in the Second Proposed Investment Adviser Rule and the SEC in
recent rulemakings for investment advisers.\334\ This is a well-known,
common-sense understanding of investment adviser size based on assets
under management (e.g., small advisers are those managing less than $25
million in customer assets). Further, FinCEN notes that over 70 percent
of advisers covered by the proposed rule manage at least $110 million
in customer assets and accordingly would not be understood to be small
entities.
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\333\ See 15 U.S.C. 80b-3a. As described above, SEC registration
is generally determined by AUM. See supra, n. 24. In addition,
investment advisers filing Form PF are required to provide
additional information if they have more than $1.5 billion in hedge
fund assets under management or more than $2 billion in private
equity fund assets under management. See Form PF Instructions on p.
2 and 3 at https://www.sec.gov/files/formpf.pdf.
\334\ See 80 FR at 52695; see also SEC, Private Fund Advisers;
Documentation of Registered Investment Adviser Compliance Reviews,
Final Rule, Investment Advisers Act Release No. 6383 (Aug. 23, 2023)
88 FR 63206, 63382-3, (Sep. 14, 2023).
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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. FinCEN requests comment on the
appropriateness of using the SEC's definition for these purposes.
Under SEC rules under the Advisers Act, for the purposes of the
RFA, an investment adviser generally is a small entity if it: (i) has,
and reports on Form ADV, assets under management of less than $25
million; (ii) has less than $5 million on the last day of its most
recent fiscal year; and (iii) 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.\335\
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\335\ 17 CFR 275.0-7(a).
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Generally speaking, only large advisers, having $110 million or
more in regulatory assets under management, are required to register
with the SEC.\336\ The proposed rule would not affect most investment
advisers that are small entities (``small advisers'') because they are
generally registered with one or more State securities authorities and
not with the SEC. Under section 203A of the Advisers Act, most small
advisers are prohibited from registering with the Commission and are
regulated by State regulators.\337\
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\336\ See 17 CFR 275.203A-1.
\337\ Based on Form ADV data as of July 31, 2023. To determine
the number of RIAs that were ``small entities'', Treasury reviewed
responses to Items 5.F. and 12 of Form ADV.
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As of July 2023, there were 573 RIAs that would be considered
``small entities'' under the SEC's definition. We estimate that there
are no ERAs that would meet the definition of ``small entity.'' \338\
Therefore, approximately 2.7 percent of all investment advisers
impacted by the proposed regulation are estimated to be small entities.
Based on this, FinCEN estimates that the proposed rule will not impact
a substantial number of small entities.
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\338\ In order for an adviser to be an ERA it would first need
to have an SEC registration obligation, and an adviser with that
little in assets under management (i.e., assets under management
that is low enough to allow the adviser to qualify as a small
entity) would not have an SEC registration obligation. See 88 FR
63206, 63383 and footnote 1895 regarding small entity ERAs.
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Regarding the economic impact on small entities, Form ADV does not
collect revenue information. Therefore, additional information on
investment advisers was obtained from the U.S. Economic Census. The
Economic Census, conducted every five years by the U.S. Census Bureau,
is the U.S. Government's official measure of American businesses,
representing most industries and geographic areas of the United States
and Island Areas.\339\ It provides information on business locations,
employees, payroll, and revenues. The most recent Economic Census data
reflect business information for 2017. These data are reported in the
U.S. Census Bureau's annual Statistics of U.S. Businesses (SUSB).
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\339\ U.S. Census Bureau, Economic Census, web page, last
updated on Aug. 31, 2023.
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Based on data from the 2017 SUSB: Other Financial Investment
Activities (for NAICS 5239), the average firm had approximately $7.4
million in annual revenue adjusted for inflation to 2022 dollars using
the GDP price deflator.\340\ Furthermore, according to that data,
approximately 98 percent of firms had less than $50 million in annual
receipts, with average revenues of approximately $1.6 million measured
in 2022 dollars. Table B-1 reports the distribution of firms in other
financial investment activities (NAICS 5239) by firm size.
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\340\ Data accessed at https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.
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[[Page 12175]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.070
Importantly, as discussed above regarding the limitations with
Economic Census data, the $1.6 million figure is an imperfect proxy for
the annual revenues of investment advisers subject to the proposed rule
that meet the SEC's definition of a small entity.
As further detailed in the section below, using information from
the SUSB for firms with revenues below $50 million, FinCEN estimates
that the annualized cost burden of the proposed rule would be
approximately 2.6 percent of revenues for a small investment adviser.
FinCEN is unable to conclusively determine whether such a cost burden
would be ``significant'' for purposes of the RFA, and so as it is
unable to certify that the proposed rule would not ``have a significant
economic impact on a substantial number of small entities.'' Therefore,
FinCEN is conducting this IRFA.
3. Compliance Costs
To examine the potential impact of the proposed rule on small
entities, FinCEN estimates the average compliance costs for a small
firm and compares those costs to small firms' average annual revenues.
As described above, 573 RIAs would be considered small entities under
the proposed definition. All small firms affected by this rule will
bear upfront costs to revise their standard operating procedures to
establish or update an existing AML/CFT program. Small firms that do
not already have a significant or moderate number of AML/CFT measures
in place would need to adopt additional measures, such as collecting
additional information to develop a customer risk profile for new and
existing clients and conducting ongoing CDD, filing SARs, acquiring
AML/CFT software licenses, complying with other information collection
requests, and general recordkeeping activities. To estimate these costs
for small entities, FinCEN relies on the methodology described in the
Impact Analysis applied to the subset of entities and relevant
financial characteristics of small RIAs. Table B.2 reports the
financial characteristics of small entities compared with all other
RIAs impacted under the proposed rule based on information reported in
their Form ADV filings.\341\
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\341\ This information is reported in Table 2.7 of the Impact
Analysis.
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[[Page 12176]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.071
Based on this information, the average cost of the proposed rule
for a small investment adviser (i.e., those managing up to $25 million
in client assets) would be approximately $48,000 in the first year of
the regulation and $40,000 in subsequent years. These costs vary
slightly across the different categories of RIAs described in the
Impact Analysis, with a small number of dual registrants likely to
incur less than $1,000 in compliance costs. Table B.3. reports the
average costs per small entity by compliance activity in the first year
and subsequent years of the proposed regulation.
[GRAPHIC] [TIFF OMITTED] TP15FE24.072
Therefore, the average annualized cost of the proposed rule for a
small investment adviser over the first 10 years would be approximately
$41,000. This suggests the annualized cost burden of the proposed rule
would be approximately 2.6 percent of revenues for a small investment
adviser when using information from the SUSB for firms with revenues
below $50 million. However, this estimate assumes that less than 1
percent of small investment advisers have a significant number of AML/
CFT measures in place and more than 60 percent have a limited number of
AML/CFT measures in place and would have to develop a full AML/CFT
program and initial and ongoing CDD measures. If the assumed
distribution was overly pessimistic and more small investment advisers
had a significant or moderate number of existing AML/CFT measures in
place in the baseline, the average cost burden would be lower. Based on
the lower bound estimate discussed in section 3, the average annualized
cost of the proposed rule for a small investment adviser would be
approximately $38,000, suggesting the average cost burden would be
approximately 2.4 percent of revenues. Table B.4 reports the number of
small entities, annualized cost, and compliance cost as a percentage of
revenue for small firms, broken down by industry category.
[[Page 12177]]
[GRAPHIC] [TIFF OMITTED] TP15FE24.073
4. Duplicative, Overlapping, or Conflicting Federal Rules
As described above in section VII.A.1, there are no Federal rules
that directly and fully duplicate, overlap, or conflict with the
proposed rule. While some investment advisers implement AML/CFT
requirements because they are dually registered as broker-dealers, as a
bank, or affiliated with a bank or broker-dealer, the majority of the
investment adviser industry is not subject to any comprehensive AML/CFT
requirements. FinCEN is aware that requirements within the Advisers Act
and other Federal securities laws impose requirements upon investment
advisers that in some instances are similar to the requirements
proposed within this rule and perform similar roles (i.e., improving
the integrity of the U.S. financial system and protecting customers).
However, while these existing requirements may provide a supporting
framework for implementing certain obligations in the proposed rule,
they do not impose the specific AML/CFT measures in the proposed rule.
5. Significant Alternatives That Reduce Burden on Small Entities
FinCEN considered the burden this proposed approach would have on
covered investment advisers. FinCEN is mindful of the effect of new
regulations on small businesses, given their critical role in the U.S.
economy and the special consideration that Congress and successive
administrations have mandated that Federal agencies should give to
small business concerns. FinCEN considered an alternative scenario in
the Impact Analysis above (Alternative 2) that would apply a much more
limited information collection requirement to only those RIAs that
advise private funds and ERAs (who only advise private funds). In this
scenario, advisers to private funds would be required to conduct risk-
based customer due diligence and to report beneficial ownership
information.
[GRAPHIC] [TIFF OMITTED] TP15FE24.074
Based on the cost information in the table above and the number of
legal entity and PIV customers of small entity RIAs identified in Table
2.7 of the Impact Analysis, FinCEN estimates that the cost of this
alternative for each small entity would be less than $1,000 on average.
Despite the significantly smaller cost of this alternative, FinCEN
determined that this alternative would not accomplish the objectives of
the proposed rule. As noted above, the absence of a SAR filing
requirement would limit the potential benefits to law enforcement to
investigate financial crimes and interagency cooperation on national
security threats and their associated financial activity. Further,
without being defined as financial institutions and thereby being able
to receive and share information under sections 314(a) and 314(b),
investment advisers would be unable to access useful information to
help mitigate illicit finance risks.
As another alternative to reduce the burden on small entities,
FinCEN considered limiting the applicability of the proposed rule to
investment advisers with AUM above a certain threshold, as reported on
Form ADV. Investment advisers with AUM below the threshold would be
exempt from the requirements of the proposed rule.
FinCEN decided not to pursue this alternative because doing so
would not apply a risk-based approach to the industry. AUM by itself,
without
[[Page 12178]]
considering the attributes of a particular customer (such as legal
entity v. natural person, or U.S. v. non-U.S. person), is not a useful
indicator of potential risk.\342\ Such an exemption could also create a
subset of ``smaller'' investment advisers who may actually be more
vulnerable to illicit finance because they can offer the same services
as other advisers, but without any AML/CFT requirements.
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\342\ See Treasury, Investment Adviser Illicit Finance Risk
Assessment, https://home.treasury.gov/system/files/136/US-Sectoral-Illicit-Finance-Risk-Assessment-Investment-Advisers.
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FinCEN also notes that the AML/CFT requirements in the proposed
rule are designed to be risk-based and their cost is largely based on
factors directly correlated with the size of an investment adviser,
such as the number of customers and transactions, along with the risk
level of its advisory activities and customers. For instance, according
to the 2020 GAO BSA Report, the two most costly requirements for banks
as a percentage of total AML/CFT compliance costs were the customer due
diligence and SAR filing requirements, accounting for approximately 60
percent of total costs.\343\ The cost of other requirements in the
proposed rule, such as employee training, are also likely to vary with
the size of the business. The requirements of the proposed rule
therefore have some inherent flexibility whereby small entities serving
a smaller number of customers are likely to have lower costs.
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\343\ 2020 GAO BSA Report at p. 3.
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FinCEN welcomes comment on this IRFA and any significant
alternatives that would minimize the impact of the proposed rule on
small entities and still accomplish the objectives of the proposed
rule.
C. Paperwork Reduction Act
The reporting requirements in the proposed rule are being submitted
to OMB for review in accordance with the Paperwork Reduction Act of
1995 (PRA).\344\ Under the PRA, an agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless it displays a valid control number assigned by OMB. Written
comments and recommendations for the proposed information collection
can be submitted by visiting www.reginfo.gov/public/do/PRAMain. This
particular document may be found by selecting ``Currently Under
Review--Open for Public Comments'' or by using the search function.
Comments are welcome and must be received by April 15, 2024. In
accordance with requirements of the PRA, 44 U.S.C. 3506(c)(2)(A), and
its implementing regulations, 5 CFR part 1320, the following
information concerns the collection of information as it relates to the
proposed rule and is presented to assist those persons wishing to
comment on the information collection.
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\344\ 44 U.S.C. 3506(c)(2)(A).
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The PRA analysis included herein is for the sections of the
proposed rule requiring RIAs and ERAs to (a) establish AML/CFT
programs, to include risk-based procedures for conducting ongoing
customer due diligence; (b) report suspicious activity and file CTRs;
(c) maintain records of originator and beneficiary information for
certain transactions; (d) apply information sharing provisions with the
government and between financial institutions; and (e) implement
special due diligence requirements for correspondent and private
banking accounts and special measures under section 311 of the USA
PATRIOT Act.
Reporting and Recordkeeping Requirements: The proposed rule would
require RIAs and ERAs to develop and implement AML/CFT programs, file
SARs and CTRs, record originator and beneficiary information for
transactions, respond to section 314(a) requests, and implement special
due diligence measures for correspondent and private banking accounts.
The AML/CFT programs must be written (first year only), and updated,
stored, and made available for inspection by FinCEN and the SEC. The
AML/CFT program must also be approved by the investment adviser's board
of directors or trustees.
OMB Control Numbers: 1506-AB58.
Frequency: As required; varies depending on the requirement.
Description of Affected Public: investment advisers, as defined in
the proposed rule.
Estimated Number of Respondents: 21,237 investment advisers. Of
these, there are an estimated 15,391 SEC-registered investment advisers
and 5,846 exempt reporting advisers. 1,356,780 clients of investment
advisers in the first year and up to 266,407 new clients in each
subsequent year, although this figure will vary from year to year.
Estimated Total Annual Reporting and Recordkeeping Burden: FinCEN
estimates that during Year 1 the annual burden will be 7,142,302 hours
for investment advisers and 508,792 hours for their clients. That
burden will decrease after the first year because several information
collection activities will only result in costs for these entities in
Year 1. Specifically, investment advisers that do not already have a
written AML/CFT program will have to develop one in the first year. In
addition, entities that do not already conduct customer due diligence
activities consistent with the requirements under the BSA will have to
implement those information collection activities in the first year.
FinCEN estimates that several of these costs will be incurred only in
the first year of the regulation, but information collection activities
related to understanding the nature and purpose of all existing
customer accounts will likely be incurred over the first few years due
to the large number of accounts--in this case, FinCEN assumes these
costs will be spread over the first three years of the proposed
regulation. Furthermore, FinCEN assesses that the information
collection burden associated with customer due diligence will increase
over time because the total number of clients is expected to grow each
year. The number of clients and therefore the total costs associated
with due diligence measures are expected to grow over time. Thus, there
will be stepwise decrease in burden hours in Year 2 and Year 4, but a
gradual increase in burden hours in Year 3 and Years 5 through 10 due
to growth in the number of clients. In Year 10, FinCEN estimates the
annual burden of the proposed regulation will be 5,395,622 hours for
investment advisers and 99,903 hours for new clients, with no
additional burden for existing clients.
Estimated Total Annual Reporting and Recordkeeping Cost: As
described in section 3, FinCEN calculated a weighted fully loaded
hourly labor cost based on the roles, hourly wage rates, and burden
distribution of staff involved in each information collection activity.
FinCEN estimates that during Year 1 the annual cost will be
$429,383,548 for investment advisers and $25,016,407 for their clients.
In Year 10, FinCEN estimates the total cost of the proposed regulation
will be $311,901,932 for investment advisers and $4,812,035 for their
clients.
Table C.1 reports the total number of investment advisers, burden
hours, and costs by information collection activity. Burden hours and
costs are calculated by multiplying the number of entities by the
hours/costs per entity for each information collection activity. Burden
hours and costs are summarized for Year 1 and Year 10.
Table C.2 reports the total number of clients, burden hours, and
costs by information collection activity. Burden hours and costs are
calculated by multiplying the number of clients by the hours per
entity. Burden hours and costs are summarized for Year 1 and Year 10.
[[Page 12179]]
Table C.3 reports the total cost of information collection by year.
Tables C.4 through C.10 report additional detail for each subset of
entities, including information on the distribution of the information
collection burden across different groups. These tables summarize the
number of entities, burden hours per entity, total burden hours,
average cost per entity, and total cost.
Table C.11 reports the total cost of information collection for the
customers of investment advisers. This table summarizes the number of
customers, burden hours per customer, total burden hours, average cost
per customer, and total cost.
BILLING CODE 4810-02-P
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BILLING CODE 4810-02-C
D. Unfunded Mandates Reform Act
UMRA (section 202(a)) requires Federal agencies to prepare a
written statement, which includes an assessment of anticipated costs
and benefits, before issuing ``any rule that includes any Federal
mandate that may result in the expenditure by State, local, and Tribal
governments, in the aggregate, or by the private sector, of $100
million or more (adjusted annually for inflation) in any one year.''
The current threshold after adjustment for inflation is $176 million,
using the 2022 GDP price deflator.\345\ The proposed rule would result
in an expenditure in at least one year that meets or exceeds this
amount.
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\345\ U.S. Bureau of Economic Analysis, National Income and
Product Accounts Tables, Table 1.1.9. Implicit Price Deflators for
Gross Domestic Product.
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The total annualized cost of the proposed rule is estimated to be
approximately $1.0 billion to the private sector in the first year. The
annualized cost of the proposed rule after the first year is estimated
to be approximately $760 million to the private sector. The proposed
rule does not foreseeably impose costs or other compliance burden that
would impact any State, local, or Tribal government. FinCEN believes
that the Impact Analysis provides the analysis required by UMRA.
E. Questions for Comment
FinCEN requests comment on all aspects of the regulatory analysis
in section VI:
Do you agree with how FinCEN has characterized the extent
to which different types of investment advisers are already
implementing a significant, moderate, or a limited number of the AML/
CFT requirements of the proposed rule?
For ERAs, do you agree with FinCEN's assumption that the
percentage of ERAs currently applying AML/CFT requirements would be the
same as RIAs across all scenarios described in the Impact Analysis?
Do you agree with FinCEN's assumption that the number of
employees of an ERA is similar to the number of employees of an RIA
with the same number of private funds?
Do you agree with FinCEN's decision to not quantify the
estimated benefits from the proposed rule? If no, what other data or
methods may inform estimates of potential benefits from the proposed
rule?
Do you agree that some RIAs would designate their existing
compliance officer as the AML/CFT compliance officer? What other
existing positions in an RIA or ERA may be designated as the AML/CFT
compliance officer?
Do you agree with FinCEN's use of the reported values for
``Large Community Bank B,'' from the 2020 GAO BSA Report, as the entity
for which the costs were assessed to be the most similar to the costs
likely to be incurred by investment advisers covered by the proposed
regulation?
Do you agree with FinCEN's assumption that dual
registrants covered by an existing AML/CFT program and entities that
have a significant or moderate number of AML/CFT measures in place
would only need to update their existing program to comply with the
requirements of the proposed rule?
Do you agree with FinCEN's estimates that it would take
approximately 4 hours for a trustee or director to review and approve a
written AML/CFT program the first year and approximately 2 hours each
subsequent year to review the program?
Do you agree with FinCEN's estimate that it would
initially take an RIA or ERA that does not have an AML/CFT program 50
hours to develop an AML/CFT training program, and that for entities
that have an existing AML/CFT training program, it would take
approximately 10 hours to review and update training materials?
Do you agree with FinCEN's estimate that the average cost
of independent testing of an adviser's AML/CFT program would be
approximately $17,000?
Do you agree with FinCEN's assumption that of all the AML/
CFT measures in the proposed rule, RIAs and ERAs are most likely to
have some CDD measures in place, and that RIAs and ERAs would have to
modify these existing procedures rather than develop new procedures?
Do you agree with FinCEN's assumption that RIAs and ERAs
would update customer information on existing accounts over the first
three years after the promulgation of the proposed rule?
Do you agree with FinCEN's assumption that unless an
investment adviser is dual registrant or affiliated adviser, they are
not currently filing SARs?
Do you agree with FinCEN's estimate that RIAs are likely
to file approximately 60 SARs per year? Do you agree with FinCEN's
assumption that ERAs would also file 60 SARs a year? If not, what other
estimate for the number of SARs or an RIA or ERA would be reasonable?
Do you agree with FinCEN's decision to attribute labor
costs primarily to a compliance officer rather than a financial clerk
or teller, due to the smaller size of investment advisers relative to
banks and to avoid potentially underestimating the average hourly labor
costs associated with these activities?
Do you agree with FinCEN's estimate that since all
investment advisers are required to report transactions in currency
over $10,000 on Form 8300, the incremental cost for RIAs and ERAs to
use the CTR would be de minimis?
Do you agree with FinCEN's decision to define the term
small entity in accordance with definitions obtained from SEC rules
implementing the Advisers Act in lieu of using the Small Business
Administration's definition?
Do you agree with how FinCEN has characterized the
potential costs and benefits of imposing the AML/CFT requirements of
the proposed rule to State-registered investment advisers?
Are there other significant alternatives that would
minimize the impact of the proposed rule on small entities and still
accomplish the objectives of the proposed rule?
List of Subjects
31 CFR Part 1010
Administrative practice and procedure, Anti-money laundering,
Banks, Banking, Brokers, Brokerage, Investment advisers, Money
laundering, Mutual funds, Reporting and recordkeeping requirements,
Securities, Suspicious transactions, Terrorist financing.
31 CFR Part 1032
Administrative practice and procedure, Anti-money laundering,
Banks, Banking, Brokers, Brokerage, Investment advisers, Money
laundering, Mutual funds, Reporting and recordkeeping requirements,
Securities, Small business, Suspicious transactions, Terrorist
financing.
Issuance and Authority
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 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307 ;
sec. 701, Pub. L. 114-74, 129 Stat. 599; sec. 6403, Pub. L. 116-283,
134 Stat. 3388.
[[Page 12190]]
0
2. Section 1010.100 is amended 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 adding in
its place ``; 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)), or any person that is exempt from SEC
registration under section 203(l) or 203(m) of the Investment Advisers
Act of 1940 (15 U.S.C. 80b-3(l), (m)).
0
3. Section 1010.410 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (e)(6)(i)(I);
0
b. Removing the word ``and'' at the end of paragraph (e)(6)(i)(J) and
adding in its place ``or''; and
0
c. Adding paragraph (e)(6)(i)(K).
The addition reads as follows:
Sec. 1010.410 Records to be made and retained by financial
institutions.
* * * * *
(e) * * *
(6) * * *
(i) * * *
(K) An investment adviser; and
* * * * *
0
4. Section 1010.605 is amended by:
0
a. Removing the word ``and'' at the end of paragraph (c)(2)(iii);
0
b. Removing the period at the end of paragraph (c)(2)(iv) and adding in
its place ``; and'';
0
c. Adding paragraph (c)(2)(v);
0
d. Removing the word ``and'' at the end of paragraph (e)(1)(iii);
0
e. Adding the word ``and'' at the end of paragraph (e)(1)(iv); and
0
f. Adding paragraph (e)(1)(v).
The additions read as follows:
Sec. 1010.605 Definitions.
* * * * *
(c) * * *
(2) * * *
(v) As applied to investment advisers (as set forth in paragraph
(e)(1)(v) of this section) means any contractual or other business
relationship established between a person and an investment adviser to
provide advisory services.
* * * * *
(e) * * *
(1) * * *
(v) An investment adviser except that an investment adviser shall
not be considered a covered financial institution for the purposes of
Sec. 1010.230.
* * * * *
0
5. Section 1010.810 is amended 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
6. Add part 1032 to read as follows:
PART 1032--RULES FOR INVESTMENT ADVISERS
Subpart A--Definitions
Sec.
1032.100 Definitions.
Subpart B--Programs
1032.200 General.
1032.210 Anti-money laundering/countering the financing of terrorism
programs for investment advisers.
1032.220 [Reserved]
Subpart C--Reports Required To Be Made by Investment Advisers
1032.300 General.
1032.310 Reports of transactions in currency.
1032.311 Filing obligations.
1032.312 Identification required.
1032.313 Aggregation.
1032.314 Structured transactions.
1032.315 Exemptions.
1032.320 Reports by investment advisers of suspicious transactions.
Subpart D--Records Required To Be Maintained by Investment Advisers
1032,400 General.
1032.410 Recordkeeping.
Subpart E--Special Information Sharing Procedures To Deter Money
Laundering and Terrorist Activity
1032.500 General.
1032.520 Special information sharing procedures To Deter money
laundering and terrorist activity for investment advisers.
1032.530 [Reserved]
1032.540 Voluntary information sharing among financial institutions.
Subpart F--Special Standards of Diligence; Prohibitions, and Special
Measures for Investment Advisers
1032.600 General.
1032.610 Due diligence programs for correspondent accounts for
foreign financial institutions.
1032.620 Due diligence programs for private banking accounts.
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307.
Subpart A--Definitions
Sec. 1032.100 Definitions.
Refer to Sec. 1010.100 of this chapter for general definitions not
noted in this part.
Subpart B--Programs
Sec. 1032.200 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. 1032.210 Anti-money laundering/countering the financing of
terrorism programs for investment advisers.
(a) Anti-money laundering/countering the financing of terrorism
program requirements for investment advisers. (1) Each investment
adviser shall develop and implement a written anti-money laundering/
countering the financing of terrorism (AML/CFT) program that is risk-
based and reasonably designed to prevent the investment adviser from
being used for money laundering, terrorist financing, or other illicit
finance 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 promulgated thereunder by the
Department of the Treasury. The investment adviser may deem the
requirements in this subpart satisfied for any mutual fund (as defined
in 31 CFR 1010.100(gg)) it advises that has developed and implemented
an AML/CFT program compliant with the AML/CFT program requirements
applicable to mutual funds under another provision of this subpart.
(2) Each investment adviser's anti-money laundering/countering the
financing of terrorism 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/countering the financing of terrorism
program available for inspection by FinCEN or the Securities and
Exchange Commission (SEC).
(b) Minimum requirements. The anti-money laundering/countering the
[[Page 12191]]
financing of terrorism 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, terrorist financing, or other illicit
finance activities and to achieve compliance with the applicable
provisions of the Bank Secrecy Act and implementing regulations in this
chapter;
(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;
(4) Provide ongoing training for appropriate persons; and
(5) Implement appropriate risk-based procedures for conducting
ongoing customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships
for the purpose of developing a customer risk profile; and
(ii) Conducting ongoing monitoring to identify and report
suspicious transactions and, on a risk basis, to maintain and update
customer information.
(c) Effective date. An investment adviser must develop and
implement an anti-money laundering/countering the financing of
terrorism program that complies with the requirements of this section
on or before [DATE 12 MONTHS AFTER EFFECTIVE DATE OF FINAL RULE].
(d) Duty. The duty to establish, maintain, and enforce an anti-
money laundering/countering the financing of terrorism program as
required by this subpart must remain the responsibility of, and be
performed by, persons in the United States who are accessible to, and
subject to oversight and supervision by, FinCEN and the appropriate
Federal functional regulator.
Sec. 1032.220 [Reserved]
Subpart C--Reports Required To Be Made by Investment Advisers
Sec. 1032.300 General.
Investment advisers are subject to the reporting requirements set
forth and cross referenced in this subpart. Investment advisers should
also refer to subpart C of part 1010 of this chapter for reporting
requirements contained in that subpart that apply to investment
advisers.
Sec. 1032.310 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 and this
subpart.
Sec. 1032.311 Filing obligations.
Refer to Sec. 1010.311 of this chapter for reports of transactions
in currency filing obligations for investment advisers.
Sec. 1032.312 Identification required.
Refer to Sec. 1010.312 of this chapter for identification
requirements for reports of transactions in currency filed by
investment advisers.
Sec. 1032.313 Aggregation.
Refer to Sec. 1010.313 of this chapter for reports of transactions
in currency aggregation requirements for investment advisers.
Sec. 1032.314 Structured transactions.
Refer to Sec. 1010.314 of this chapter for rules regarding
structured transactions for investment advisers.
Sec. 1032.315 Exemptions.
Refer to Sec. 1010.315 of this chapter for exemptions from the
obligation to file reports of transactions in currency for investment
advisers.
Sec. 1032.320 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
any other reporting requirements 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 chapter 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 chapter. 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 of facts 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
[[Page 12192]]
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 the Financial Crimes Enforcement
Network or the Securities and Exchange Commission. Investment advisers
wishing to voluntarily report suspicious transactions that may relate
to terrorist activity may call the Financial Crimes Enforcement
Network's Financial Institutions Hotline at 1-866-556-3974 in addition
to filing timely a SAR if required by this section. The investment
adviser may also, but is not required to, contact the Securities and
Exchange Commission to report in such situations.
(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 that 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. An investment adviser shall
make all supporting documentation available 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, upon request.
(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 chapter.
(1) Prohibition on disclosures by investment advisers--(i) General
rule. 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. Any
investment adviser, and any current or former 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 the transaction has
been reported, this paragraph (d)(1) shall not be construed as
prohibiting:
(A) The disclosure by an investment adviser, or any current or
former 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:
(i) To another financial institution, or any current or former
director, officer, employee, or agent of a financial institution, for
the preparation of a joint SAR; or
(ii) In connection with certain employment references or
termination notices, to the full extent authorized in 31 U.S.C.
5318(g)(2)(B); or
(B) The sharing by an investment adviser, or any current or former
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 current or former 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 current
or former 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 to
any person 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 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.
Subpart D--Records Required To Be Maintained by Investment Advisers
Sec. 1032.400 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. 1032.410 Recordkeeping.
For regulations regarding recordkeeping, refer to Sec. 1010.410 of
this chapter.
Subpart E--Special Information Sharing Procedures To Deter Money
Laundering and Terrorist Activity
Sec. 1032.500 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. 1032.520 Special information sharing procedures to deter money
laundering and terrorist activity for investment advisers.
For regulations regarding special information sharing procedures to
deter money laundering and terrorist activity for investment advisers,
refer to Sec. 1010.520 of this chapter.
Sec. 1032.530 [Reserved]
Sec. 1032.540 Voluntary information sharing among financial
institutions.
For regulations regarding voluntary information sharing among
financial institutions, refer to Sec. 1010.540 of this chapter.
[[Page 12193]]
Subpart F--Special Standards of Diligence; and Special Measures for
Investment Advisers
Sec. 1032.600 General.
Investment advisers are subject to the special standards of
diligence; prohibitions; and special measures requirements set forth
and cross referenced in this subpart. Investment advisers should also
refer to subpart F of part 1010 of this chapter for special standards
of diligence; prohibitions; and special measures contained in that
subpart, which apply to investment advisers.
Sec. 1032.610 Due diligence programs for correspondent accounts for
foreign financial institutions.
For regulations regarding due diligence programs for correspondent
accounts for foreign financial institutions, refer to Sec. 1010.610 of
this chapter.
Sec. 1032.620 Due diligence programs for private banking accounts.
For regulations regarding due diligence programs for private
banking accounts, refer to Sec. 1010.620 of this chapter.
Andrea M. Gacki,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2024-02854 Filed 2-13-24; 8:45 am]
BILLING CODE 4810-02-P