[Federal Register Volume 89, Number 99 (Tuesday, May 21, 2024)]
[Proposed Rules]
[Pages 44571-44597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-10738]


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DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Part 1032

RIN 1506-AB66

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. BSA-1; File No. S7-2024-02]
RIN 3235-AN34


Customer Identification Programs for Registered Investment 
Advisers and Exempt Reporting Advisers

AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Department 
of the Treasury; Securities and Exchange Commission (``SEC'' or 
``Commission'').

ACTION: Joint notice of proposed rulemaking.

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SUMMARY: The Department of the Treasury and the SEC are jointly issuing 
a proposed rulemaking implementing the Uniting and Strengthening 
America by Providing Appropriate Tools Required to Intercept and 
Obstruct Terrorism Act of 2001 with regard to certain investment 
advisers. If, as proposed in a separate rulemaking, certain investment 
advisers are included in the definition of ``financial institution'' 
under the Bank Secrecy Act, the Secretary of the Treasury and the SEC 
will be required to jointly prescribe a regulation that, among other 
things, requires investment advisers to implement reasonable procedures 
to verify the identities of their customers.

DATES: Written comments on this notice of joint proposed rulemaking 
(``NPRM'') must be submitted on or before July 22, 2024.

ADDRESSES: 
    Treasury: 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-2024-0011.
     Mail: Policy Division, Financial Crimes Enforcement 
Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-
2024-0011.
    Please submit comments by one method only.
    SEC: Comments may be submitted to the SEC by any of the following 
methods:

Electronic Comments

     Use the SEC's internet comment forms (https://www.sec.gov/rules/2024/05/cip); or
     Send an email to [email protected]. Please include 
File Number S7-2024-02 on the subject line.

Paper Comments

     Send paper comments to Secretary, U.S. Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-2024-02. This file 
number should be included on the subject line if email is used. To help 
the SEC process and review your comments more efficiently, please use 
only one method of submission. The SEC will post all comments on the 
SEC's website (https://www.sec.gov/rules/2024/05/cip). Comments also 
are available for website viewing and printing in the SEC's Public 
Reference Room, 100 F Street NE, Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Operating 
conditions may limit access to the SEC's Public Reference Room. Do not 
include personally identifiable information in submissions; you should 
submit only information that you wish to make available publicly. The 
SEC may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection.
    Studies, memoranda, or other substantive items may be added by the 
SEC or staff to the comment file during this rulemaking. A notification 
of the inclusion in the comment file of any such materials will be made 
available on the SEC's website. To ensure direct electronic receipt of 
such notifications, sign up through the ``Stay Connected'' option at 
www.sec.gov to receive notifications by email.
    A summary of the proposal of not more than 100 words is posted on 
the SEC's website (https://www.sec.gov/rules/2024/05/cip).

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FOR FURTHER INFORMATION CONTACT: 
    Treasury: The FinCEN Resource Center at (800) 767-2825 or email 
[email protected].
    Securities and Exchange Commission: Daniel Levine, Attorney-
Adviser; Tom Strumpf, Branch Chief; Adele Murray, Private Funds 
Attorney Fellow; or Melissa Roverts Harke, Assistant Director, 
Investment Adviser Rulemaking Office, at (202) 551-6787 or 
[email protected], Division of Investment Management, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Statutory Provisions

    Enacted in 1970, the Currency and Foreign Transactions Reporting 
Act, generally referred to as the Bank Secrecy Act (``BSA''), is 
designed to combat money laundering, the financing of terrorism, and 
other illicit finance activity, and to safeguard the national security 
of the United States.\1\ The Secretary of the Treasury (``the 
Secretary'') delegated the authority to implement, administer, and 
enforce the BSA and its implementing regulations to the Director of 
FinCEN.\2\
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    \1\ See 31 U.S.C. 5311. Certain parts of the Currency and 
Foreign Transactions Reporting Act, as amended, and 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. 310, 5311-5314, 5316-5336, including notes 
thereto, with implementing regulations at 31 CFR chapter X.
    \2\ See 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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    Section 326 of the Uniting and Strengthening America by Providing 
Appropriate Tools Required to Intercept and Obstruct Terrorism (``USA 
PATRIOT Act'') of 2001 added a subsection to the BSA, subsection (l) to 
31 U.S.C. 5318, in order to facilitate the prevention, detection, and 
prosecution of international money laundering and the financing of 
terrorism. Subsection 31 U.S.C. 5318(l) requires the Secretary to 
``prescribe regulations setting forth the minimum standards for 
financial institutions and their customers regarding the identity of 
the customer that shall apply in connection with the opening of an 
account at a financial institution.'' The regulations implementing 
section 326 must, at a minimum, ``require financial institutions to 
implement, and customers (after being given adequate notice) to comply 
with, reasonable procedures for--(A) verifying the identity of any 
person seeking to open an account to the extent reasonable and 
practicable; (B) maintaining records of the information used to verify 
the person's identity, including name, address, and other identifying 
information; and (C) consulting lists of known or suspected terrorists 
or terrorist organizations provided to the financial institution by any 
government agency to determine whether a person seeking to open an 
account appears on any such list.'' \3\ These programs are referred to 
as Customer Identification Programs (``CIPs'') and are long-standing, 
foundational components of a financial institution's anti-money 
laundering program.
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    \3\ 31 U.S.C. 5318(l)(2).
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    As enacted, section 326 applies to all ``financial institutions.'' 
This term is defined broadly in the BSA to encompass a variety of 
entities, including commercial banks; agencies, and branches of foreign 
banks in the United States; thrift institutions, credit unions, and 
private bankers; trust companies; securities brokers and dealers 
registered with the Commission; investment companies; futures 
commission merchants; insurance companies; travel agencies; 
pawnbrokers; dealers in precious metals, stones, and jewels; check-
cashers; certain casinos; and telegraph companies, among others.\4\ The 
BSA also grants authority to the Secretary to define, by regulation, 
additional types of businesses as financial institutions where the 
Secretary 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.\5\ As part of the implementation, administration, and 
enforcement of the BSA, this authority has been delegated to the 
Director of FinCEN.\6\
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    \4\ See 31 U.S.C. 5312(a)(2), (c)(1); see also 31 CFR 
1010.100(t) (defining ``financial institution'' for the purposes of 
the regulations implementing the BSA).
    \5\ See 31 U.S.C. 5312(a)(2)(Y).
    \6\ See Treasury Order 180-01, para. 3(a), supra n.2.
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    On February 15, 2024, the Secretary, through FinCEN, proposed to 
designate certain investment advisers as ``financial institutions'' 
under the BSA and subject them to anti-money laundering/countering the 
financing of terrorism (``AML/CFT'') program requirements and 
Suspicious Activity Report (``SAR'') filing obligations, as well as 
other BSA requirements (``AML/CFT Program and SAR Proposed Rule'').\7\ 
Although the Investment Advisers Act of 1940 (``Advisers Act'') and the 
rules thereunder apply to a wide range of investment advisers,\8\ the 
AML/CFT Program and SAR Proposed Rule--and the rule proposed in this 
joint NPRM as well--would only apply to a narrower subset of persons 
meeting the Advisers Act definition of ``investment adviser'': \9\ 
advisers registered or required to be registered with the SEC (referred 
to as ``registered investment advisers,'' or ``RIAs''), as well as 
those exempt from registration under sections 203(l) or 203(m) of the 
Advisers Act and applicable rules thereunder (referred to as ``exempt 
reporting advisers,'' or ``ERAs'').
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    \7\ See FinCEN, Anti-Money Laundering/Countering the Financing 
of Terrorism Program and Suspicious Activity Report Filing 
Requirements for Registered Investment Advisers and Exempt Reporting 
Advisers, Notice of Proposed Rulemaking, 89 FR 12108 (Feb. 15, 
2024).
    \8\ Unless otherwise noted, when we refer to the Advisers Act, 
we are referring to 15 U.S.C. 80b, and when we refer to rules under 
the Advisers Act, we are referring to title 17, part 275 of the Code 
of Federal Regulations (17 CFR part 275).
    \9\ See 15 U.S.C. 80b-2(a)(11). Accordingly, references herein 
to ``investment advisers'' or ``advisers'' refer to RIAs and ERAs, 
unless stated otherwise.
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    In prescribing regulations for financial institutions implementing 
section 326, 31 U.S.C. 5318(l)(3) directs the Secretary to ``take into 
consideration the various types of accounts maintained by various types 
of financial institutions, the various methods of opening accounts, and 
the various types of identifying information available.'' \10\ Further, 
31 U.S.C. 5318(l)(4) requires that implementing regulations for certain 
types of financial institutions--which would include the set of 
investment advisers proposed to be added to the definition of 
``financial institution'' through the AML/CFT Program and SAR Proposed 
Rule--be prescribed jointly with the appropriate Federal functional 
regulator (as defined in section 509 of the Gramm-Leach-Bliley 
Act).\11\ The appropriate Federal functional regulator for investment

[[Page 44573]]

advisers is the SEC.\12\ Thus, FinCEN and the SEC are issuing this 
proposed rule jointly.
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    \10\ 31 U.S.C. 5318(l)(3).
    \11\ 31 U.S.C. 5318(l)(4) requires that any CIP requirement for 
financial institutions that engage in financial activities described 
in section 4(k) of the Bank Holding Company Act be prescribed 
jointly with each Federal functional regulator. This list of 
activities includes, among others, ``providing financial, 
investment, or economic advisory services.'' See 12 U.S.C. 
1843(k)(4)(C). 15 U.S.C. 6809(2) lists the institutions that may be 
a Federal functional regulator. Adoption of this proposed rule 
would, therefore, depend on and not occur unless investment advisers 
are first designated as ``financial institutions'' for purposes of 
the BSA. Proposing CIP requirements while the AML/CFT Program and 
SAR Proposed Rule is under consideration gives affected parties an 
opportunity to consider the proposed elements of a CIP--as a CIP is 
statutorily required if investment advisers become ``financial 
institutions'' under the BSA--in the context of the AML/CFT Program 
and SAR Proposed Rule.
    \12\ See 15 U.S.C. 6809(2).
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    While investment advisers have not been previously subject to CIP 
requirements, in certain circumstances, some investment advisers 
already obtain and conduct verification of customer identity 
information.\13\ For example, some investment advisers may implement 
CIP requirements if the entity is also a registered broker-dealer \14\ 
or a bank (i.e., a dual registrant), or is an operating subsidiary of a 
bank; \15\ other investment advisers are affiliates of banks or broker-
dealers, which may implement an enterprise-wide AML/CFT program that 
includes a CIP. In addition, some investment advisers have already 
implemented voluntary AML/CFT programs that may include CIP 
measures.\16\
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    \13\ 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. We acknowledge 
that the Advisers Act and its implementing regulations primarily use 
the term ``clients,'' and therefore, we use that term herein when 
making specific reference to Advisers Act requirements.
    \14\ See 31 CFR 1023.220 (CIP rule for broker-dealers).
    \15\ Banks are subject to their own CIP regulation. See 31 CFR 
1020.220. Banks and bank subsidiaries subject to the jurisdiction of 
the Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System (Federal Reserve), the 
Federal Deposit Insurance Corporation (FDIC), and the National 
Credit Union Administration (NCUA) (collectively, the Federal 
Financial Institutions Regulatory Agencies (FFIRAs)) are subject to 
applicable FFIRA regulations regarding the BSA, which also require 
compliance with the CIP regulation at 31 CFR 1020.220, which was 
jointly promulgated by FinCEN and the FFIRAs. See, e.g., 12 CFR 
21.21(c)(2) (OCC); 12 CFR 208.63(b)(2) (Federal Reserve), 12 CFR 
326.8(b)(2) (FDIC), 12 CFR 748.2(b)(2) (NCUA); see also 12 CFR 
5.34(e)(3) and 5.38(e)(3) (OCC regulations regarding operating 
subsidiaries of national banks and Federal savings associations). 
Investment advisers that are banks (or bank subsidiaries) are 
therefore already subject to CIP requirements in their capacities as 
banks (or bank subsidiaries) pursuant to 31 CFR 1020.220, which 
applies to banks. Under the proposed rule, RIAs that are dual 
registrants or affiliated advisers would not be legally required to 
establish a separate CIP for their advisory activities, provided 
that an existing comprehensive CIP-compliant AML/CFT program covers 
all the entity's legal and regulatory obligations under the proposed 
rule.
    \16\ See infra section C.1. of the Economic Analysis for 
additional information on when investment advisers may implement CIP 
measures; see also 89 FR at 12112 (discussing circumstances where 
some investment advisers implement AML/CFT measures).
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    This proposed rule is generally consistent with existing rules 
requiring other financial institutions, such as brokers or dealers in 
securities, open-end investment companies (such as mutual funds),\17\ 
credit unions, banks, and other financial institutions, to adopt and 
implement CIPs.\18\ The similarity between this proposed rule and those 
rules reflects the importance that FinCEN and the SEC (``the 
Commission'') assign to the harmonization of CIP requirements, 
including for the purposes of increasing effectiveness and efficiency 
for investment advisers that are affiliated with other financial 
institutions, such as banks, broker-dealers, or open-end investment 
companies (such as mutual funds) that are already subject to CIP 
requirements. CIP requirements also support the application of other 
AML/CFT measures by making it more difficult for persons to use false 
identities to establish customer relationships with investment advisers 
for the purposes of laundering money, financing terrorism, or engaging 
in other illicit finance activity.
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    \17\ The rule that applies to those investment companies falling 
within the category of ``open-end company'' contained in section 
5(a)(1) of the Investment Company Act of 1940 (codified at 15 U.S.C. 
80a-1 et seq.) that are registered or required to register under 
section 8 of that Act defined such investment companies as ``mutual 
funds.'' See FinCEN and SEC, Customer Identification Programs for 
Mutual Funds, 68 FR 25131, 25147 (May 9, 2003); see also 31 CFR 
1010.100(gg).
    \18\ See, e.g., 31 CFR 1020.220, 1023.220, 1024.220, 1026.220.
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B. Codification of the Joint Proposed Rule

    Under the proposed rule, the substantive requirements of the joint 
proposed rule would be codified with other BSA regulations as part of 
Treasury's proposed regulations in 31 CFR part 1032.

II. Section-by-Section Analysis

A. Definitions 19
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    \19\ This NPRM has definitions included at proposed Sec.  
1032.100 that are not included in the AML/CFT Program and SAR 
Proposed Rule version of proposed Sec.  1032.100. Cf. 89 FR 12108. 
If both of these rules are adopted as proposed, FinCEN and the SEC 
anticipate that this NPRM's Sec.  1032.100 would become part of 
Sec.  1032.100.
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    Section 1032.100(a) Account. The proposed rule would define 
``account'' for the purposes of investment advisers' CIP obligations as 
any contractual or other business relationship between a person and an 
investment adviser under which the investment adviser provides 
investment advisory services.\20\ The proposed definition excludes an 
account that an investment adviser acquires through an acquisition, 
merger, purchase of assets, or assumption of liabilities. Customers do 
not ``open'' such transferred accounts, and, therefore, these accounts 
do not fall within the scope of section 326.\21\ Such accounts, 
however, may still be subject to other AML/CFT requirements applicable 
to advisory activities, including activities within the scope of the 
AML/CFT Program and SAR Proposed Rule, to the extent it is adopted.\22\ 
Additionally, the definition of account would include accounts opened 
for the purpose of participating in an employee benefit plan 
established pursuant to the Employee Retirement Income Security Act of 
1974 (``ERISA''). While ERISA accounts are excluded from the definition 
of ``account'' in the CIP rules applicable to mutual funds,\23\ they 
are not being excluded here to harmonize the applicability of this 
proposed rule with the AML/CFT Program and SAR Proposed Rule, which 
would require RIAs and ERAs to apply AML/CFT program and SAR reporting 
requirements to all of their accounts, including accounts opened for 
the purpose of participating in an employee benefit plan established 
pursuant to ERISA.
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    \20\ See 15 U.S.C. 80b-2(a)(11) (defining ``investment adviser'' 
as a person engaged in the business of certain activities). FinCEN 
regulations define ``person'' as ``an individual, a corporation, a 
partnership, a trust or estate, a joint stock company, an 
association, a syndicate, joint venture, or other unincorporated 
organization or group, an Indian Tribe (as that term is defined in 
the Indian Gaming Regulatory Act) and all entities cognizable as 
legal personalities.'' 31 CFR 1010.100(mm).
    \21\ Section 326 of the USA PATRIOT Act provides that the 
regulations prescribed thereunder shall require financial 
institutions to implement reasonable procedures for ``verifying the 
identity of any person seeking to open an account.'' 31 U.S.C. 
5318(l)(2) (emphasis added). If an investment adviser acquires an 
account from another financial institution, the customer is not 
opening an account with the investment adviser.
    \22\ Such accounts are not exempted from applicable AML/CFT 
program rules or other laws or regulations that may be applicable. 
Investment advisers may need to implement reasonable procedures to 
detect money laundering in any account, however acquired, if they 
are already subject to an AML/CFT program requirement, such as in 
the case of a dual registrant. See infra section IV.C.1. below. As 
part of the proposed AML compliance program requirement for 
investment advisers, an investment adviser generally should consider 
whether it needs to take additional steps to verify the identity of 
customers, based on its assessment of the relevant risks, as well as 
to comply with other applicable AML/CFT program requirements. See, 
e.g., AML/CFT Program and SAR Proposed Rule.
    \23\ See 31 CFR 1024.100(a)(2)(ii).
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    Section 1032.100(b) Commission. The proposed rule would define 
``Commission'' to mean the United States Securities and Exchange 
Commission.
    Section 1032.100(c) Customer. The proposed rule would define 
``customer'' for the purposes of investment advisers' CIP obligations 
as a person--including a natural person or a legal entity--who opens a 
new account with an investment adviser. This means the

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person identified as the accountholder, except in the case of an 
individual who lacks legal capacity, such as a minor, and non-legal 
entities, in which case the customer would be the individual who opens 
the new account for a minor or non-legal entity. Under this proposed 
rule, an investment adviser would not be required to look through a 
trust or similar account to its beneficiaries and would only be 
required to verify the identity of the named accountholder.\24\
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    \24\ However, based on an investment adviser's risk assessment 
of a new account opened by a customer that is not an individual, an 
investment adviser may need to take additional steps to verify the 
identity of the customer by seeking information about individuals 
with authority or control over the account in order to identify the 
customer pursuant to section 1032.220(a)(2)(ii)(C) of the proposed 
rule, or may need to look through the account in connection with the 
customer due diligence procedures described in the proposed AML/CFT 
Program and SAR Proposed Rule.
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    The proposed rule's definition of ``customer'' would not include 
individuals with authority or control over the accounts, if such 
persons are not the accountholders. In addition, the definition would 
not include persons who fill out the account opening paperwork or 
provide information necessary to set up an account but are not the 
accountholder. Instead, as described below, section 
1032.220(a)(2)(ii)(C) of the proposed rule separately would require an 
investment adviser's CIP to address situations where, based on the 
investment adviser's risk assessment of a new account opened by a 
customer that is not an individual, the investment adviser will need to 
obtain information about individuals with authority or control over the 
account in order to verify the customer's identity.
    The proposed definition of ``customer'' would also not include a 
financial institution regulated by a Federal functional regulator or a 
bank regulated by a State bank regulator; certain government entities; 
certain persons (other than banks) that are publicly listed on U.S. 
securities exchanges or certain subsidiaries of persons listed on U.S. 
securities exchanges; \25\ or persons that have an existing account 
with the investment adviser, provided the investment adviser has a 
reasonable belief that it knows the true identity of the person. These 
exemptions are being included to be consistent with CIP requirements 
for other financial institutions.\26\
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    \25\ Such a person that is a financial institution, other than a 
bank, would be exempt under the proposed definition only to the 
extent of its domestic operations. See 31 CFR 1020.315(b)(4).
    \26\ See, e.g., 31 CFR 1023.100(d)(2) (broker-dealers) and 
1024.100(c)(2) (mutual funds).
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    Section 1032.100(d) Financial institution. The proposed rule 
includes a definition of ``financial institution'' that cross-
references the BSA's definition of ``financial institution'' in 31 
U.S.C. 5312(a)(2) and (c)(1), and its implementing regulations, which 
is currently codified at 31 CFR 1010.100(t).\27\ The proposed rule 
includes this definition to avoid any ambiguity about the meaning of 
``financial institution'' in proposed Sec.  1032.220(a)(6). Proposed 
Sec.  1032.220(a)(6) would allow investment advisers to rely on certain 
other financial institutions' performance of their CIP procedures under 
specific circumstances, as described below. Accordingly, and as 
described below, an investment adviser would be able to rely on such 
performance by other ``financial institutions'' as defined in 31 U.S.C. 
5312(a)(2) and (c)(1) and its implementing regulations to fulfill those 
aspects of its CIP obligations.
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    \27\ See section I.A, supra, discussing the BSA's definition of 
``financial institution.'' While the BSA expressly defines various 
entities as ``financial institutions,'' it also provides Treasury 
with the authority to designate additional entities as financial 
institutions in its regulations. Specifically, the BSA authorizes 
Treasury to define additional types of businesses as financial 
institutions if Treasury 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. See 31 U.S.C. 5312(a)(2)(Y). In the AML/CFT 
Program and SAR Proposed Rule, FinCEN is proposing to make such a 
determination with respect to the defined set of investment 
advisers, and thereby add these investment advisers to Sec.  
1010.100(t)'s definition of financial institution. See 89 FR at 
12118.
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    Section 1032.100(e) Investment adviser. The proposed rule includes 
a definition of ``investment adviser'' that is the same as the proposed 
definition of investment adviser in the AML/CFT Program and SAR 
Proposed Rule.\28\ In this way, both this proposed rule and the AML/CFT 
Program and SAR Proposed Rule would apply to the same group of persons. 
The proposed definition in the AML/CFT Program and SAR Proposed Rule--
and thus the definition proposed in this NPRM--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 is exempt 
from SEC registration under section 203(l) or 203(m) of the Advisers 
Act (15 U.S.C. 80b-3(l), (m)).'' \29\ In other words, under this 
proposed definition, an investment adviser would be any RIA (those 
registered or required to register with the SEC) or ERA (those exempt 
from SEC registration under the listed provisions).\30\ We anticipate 
that any change to the scope of the AML/CFT Program and SAR Proposed 
Rule, as finalized, would also be reflected in this rule, to ensure 
that the scope of both rules remain consistent.
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    \28\ See 89 FR at 12118.
    \29\ Id. See also 17 CFR 275.203(l)-1; 17 CFR 275.203(m)-1.
    \30\ The proposed definition of ``investment adviser'' would 
include both primary advisers and sub-advisers. The Advisers Act 
does not distinguish between advisers and sub-advisers; all are 
investment advisers.
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B. Customer Identification Program: Minimum Requirements

    Section 1032.220(a)(1) In general. Section 326 requires the 
Secretary and, where relevant, the appropriate Federal functional 
regulator (here, the SEC) to prescribe regulations requiring financial 
institutions to implement, and customers (after being given adequate 
notice) to comply with, ``reasonable procedures'' for verifying the 
identity of any person seeking to open an account, ``to the extent 
reasonable and practicable''; \31\ for maintaining records associated 
with such verification; and for consulting lists of known terrorists 
and terrorist organizations.\32\ Proposed Sec.  1032.220(a)(1) 
accordingly would require that each investment adviser establish, 
document, and maintain a written CIP as part of the AML/CFT program 
under 31 U.S.C. 5318(h).\33\ This proposed requirement is intended to 
make clear that the CIP is not a separate program, but rather would be 
incorporated into an investment adviser's overall AML/CFT program. The 
proposed rule would require that the CIP be appropriate for its size 
and business that, at a minimum, includes each of the requirements of 
paragraphs (a)(1) through (a)(5) of proposed section 1032.220.
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    \31\ Treasury and the SEC are mindful of the legislative history 
of section 326 for verification procedures. See H.R. Rep. No. 107-
250, pt. 1, at 63 (2001). (``It is the Committee's intent that the 
verification procedures prescribed by Treasury make use of 
information currently obtained by most financial institutions in the 
account opening process. It is not the Committee's intent for the 
regulations to require verification procedures that are 
prohibitively expensive or impractical.'').
    \32\ 31 U.S.C. 5318(l)(2).
    \33\ As discussed above, investment advisers are not yet 
required to have an AML/CFT program because this requirement has 
been proposed in an ongoing rulemaking.
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    The investment adviser may deem these requirements satisfied for 
any mutual fund it advises if the mutual fund has developed and 
implemented a CIP that is compliant with CIP requirements applicable to 
mutual funds under the relevant provision of this subpart. FinCEN and 
the SEC believe that this exemption is appropriate because of the 
regulatory and practical relationship between

[[Page 44575]]

mutual funds and their investment advisers. As a practical matter, we 
believe that any CIP requirement imposed on an RIA to a mutual fund is 
already addressed by the existing CIP requirements imposed on the 
mutual fund itself.\34\ Consequently, we are proposing not to require 
investment advisers to mutual funds to include those mutual funds 
within the investment advisers' own CIP programs, as doing so 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 the investment adviser's CIP requirements.
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    \34\ See 31 CFR 1024.220 (mutual fund CIP requirement); see also 
89 FR at 12123-4 (explaining the relationship between mutual funds 
and investment advisers for purposes of AML/CFT compliance).
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    Section 1032.220(a)(2) Identity verification procedures. Proposed 
Sec.  1032.220(a)(2) would require that an investment adviser's CIP 
include risk-based procedures for verifying the identity of customers, 
to the extent reasonable and practicable, and that such verification 
occur within a reasonable time before or after the customer's account 
is opened. The inclusion of ``before or after'' account opening is 
intended to offer flexibility to an adviser in complying with the 
requirements of the proposed rule during the process of creating an 
advisory relationship with a customer. The procedures must enable the 
investment adviser to form a reasonable belief that it knows the 
identity of each customer.
    A person becomes a customer each time the person opens a new 
account with an investment adviser. Therefore, upon the opening of each 
account, the verification requirements of this proposed rule would 
apply. However, if a customer whose identification has been verified 
previously opens a new account, the investment adviser would generally 
not need to verify the customer's identity again, provided the 
investment adviser (1) previously verified the customer's identity, to 
the extent required, in accordance with procedures consistent with the 
proposed rule, and (2) continues to have a reasonable belief that it 
knows the true identity of the customer based on the previous 
verification.
    Under this proposed rule, the procedures must be based on the 
investment adviser's assessment of the relevant risks, including those 
presented by the various types of accounts maintained by the investment 
adviser; the various methods of opening accounts provided by the 
investment adviser, the various types of identifying information 
available and the investment adviser's size, location, and customer 
base. Other relevant risk factors could include, for example, the types 
of money laundering and terrorist financing activities present in the 
respective jurisdiction; whether account opening occurs in-person or 
online; the types of services and transactions offered or performed by 
the investment adviser; and the reliance on third-party firms 
(including other investment advisers, broker-dealers, or funds) for 
identity verification procedures.
    Thus, in developing and updating CIPs, investment advisers would be 
required to consider the type of identifying information available for 
customers and the methods available to verify that information. While 
paragraph (a)(2)(i) of this proposed rule would require certain minimum 
identifying information to be obtained, and paragraph (a)(2)(ii) 
discusses certain suitable verification methods, as described below, 
investment advisers should consider on an ongoing basis whether other 
identifying information or verification methods are appropriate, 
particularly as they become available in the future.
    Section 1032.220(a)(2)(i) Customer information required. Pursuant 
to the proposed rule, an investment adviser's CIP must require the 
investment adviser to obtain, at a minimum, certain identifying 
information with respect to each customer before or after an account is 
opened for the customer. Specifically, the investment adviser must 
obtain with respect to each customer: (1) name; (2) date of birth for 
an individual or the date of formation for any person other than an 
individual; (3) address; \35\ and (4) identification number.\36\ Under 
proposed Sec.  1032.220(a)(2)(i), the term ``name'' would refer to a 
customer's full legal name, and the investment adviser should consider 
collecting any aliases or assumed names as well (e.g., ``doing business 
as'' or ``DBA'' names). For persons other than an individual, the date 
of formation may be available on the certificate of formation or 
incorporation (or other document used to create a legal person), as 
well as any amendments to those documents.
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    \35\ For an individual who does not have a residential or 
business street address, the proposed rule would require the adviser 
to collect an Army Post Office (APO) or Fleet Post Office (FPO) box 
number, or the residential or business street address of next of kin 
or of another contact individual. See proposed section 
1032(a)(2)(i)(A)(3)(ii). For individuals who live in rural areas who 
do not have a residential or business address, an APO or FPO, or the 
residential or business address of next of kin or another contact 
individual, an investment adviser may obtain a rural route number. A 
rural route number, unlike a post office box number, is a 
description of the approximate area where the customer can be 
located. In the absence of such a number, and in the absence of a 
residential or business address for next of kin or another contact 
individual, an APO, and an FPO, a description of the customer's 
physical location would suffice.
    \36\ Proposed section 1032(a)(2)(i)(4) would require that the 
identification number be, for a U.S. person, a taxpayer 
identification number (TIN), which could be a social security number 
for an individual. For a non-U.S. person, the identification number 
would be one or more of the following: a TIN; passport number and 
country of issuance; alien identification card number; or number and 
country of issuance of any other government-issued document 
evidencing nationality or residence and bearing a photograph or 
similar safeguard. For a non-U.S. person that is not an individual 
and that does not have an identification number, the investment 
adviser must request alternative government-issued documentation 
certifying the existence of the person. As proposed, the CIP may 
also include procedures for opening an account for a person that has 
applied for, but has not received, a TIN.
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    Proposed Sec.  1032.220(a)(2)(i)(A) would require only that this 
minimum identifying information be obtained. Investment advisers, in 
assessing the risk factors in paragraph (a)(2), however, would also be 
required to determine whether other identifying information is 
necessary to enable the investment adviser to form a reasonable belief 
that it knows the true identity of each customer. There also may be 
other circumstances that make it appropriate to obtain additional 
information.\37\ For example, under proposed section 
1032.220(a)(2)(ii)(C), an investment adviser must set forth guidelines 
in its CIP for situations where, based upon a risk-based assessment of 
a customer that is not an individual, additional information should be 
obtained about the individuals with authority or control over the 
customer's account. The CIP generally should include guidelines for 
collecting additional information in other situations where the 
investment adviser determines in the course of examining the nature of 
its business and operations that additional information should be 
obtained, consistent with a risk-based CIP, in order to enable the 
investment adviser to form a reasonable belief that it knows the true 
identity of the customer. Such guidelines generally should indicate the 
types of additional information needed and the circumstances when it 
would be obtained.
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    \37\ For example, it may be appropriate for an investment 
adviser to seek to obtain additional information about a customer 
that is a recently formed entity, given that this type of customer 
may pose a higher AML/CFT risk than established entities that may 
have longer-standing business dealings and that may be publicly 
known.
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    Proposed Sec.  1032.220(a)(2)(i)(B) includes an exception from the 
requirement to obtain a taxpayer identification number from a customer

[[Page 44576]]

opening a new account. As proposed, this exception would allow an 
investment adviser to open an account for a person that has applied 
for, but has not received, a TIN. In this case, the CIP would be 
required to include procedures to confirm that the application was 
filed before the person opened the account and to obtain the TIN within 
a reasonable period of time after the account is opened.
    Moreover, under proposed Sec.  1032.220(a)(2)(i), when opening an 
account for a non-U.S. person that is not an individual and that does 
not have an identification number, the investment adviser would be 
required to request alternative government-issued documentation 
certifying the existence of the customer. In contrast to the CIP 
requirements for mutual funds and broker dealers regarding a non-U.S. 
person that is not an individual, this specific requirement is being 
included here to account for changes in how financial institutions now 
routinely verify the identity of non-U.S. persons that are not 
individuals.
    Section 1032.220(a)(2)(ii) Customer verification. Under proposed 
Sec.  1032.220(a)(2)(ii), after obtaining identifying information with 
respect to a customer, the investment adviser would be required to 
follow risk-based procedures to verify the accuracy of that information 
in order to reach a point where it can form a reasonable belief that it 
knows the true identity of the customer. The proposed rule would 
require that verification procedures be undertaken within a reasonable 
time before or after a customer's account is opened. This flexibility 
would have to be exercised in a reasonable time, given that 
verifications too far in advance may become stale and verifications too 
long after the fact may provide opportunities to launder money or 
engage in other relevant illicit finance activity while verification is 
pending. The amount of time it will take an investment adviser to 
verify the identity of a customer may depend on the type of account 
opened, whether the customer opens the account in person, and the type 
of identifying information available. For example, an investment 
adviser may choose to place limits on the account, such as temporarily 
limiting advisory-related activities in an account until the customer's 
identity is verified in which case the adviser should inform the 
accountholder. Therefore, the proposed rule would provide investment 
advisers with the flexibility to use a risk-based approach to determine 
when the identity of a customer must be verified relative to the 
opening of an account.
    Proposed Sec.  1032.220(a)(2)(ii) would provide for two methods of 
verifying identifying information: verification through documents and 
verification through non-documentary means. This proposed provision 
would require that an investment adviser's CIP address both methods of 
verification. The CIP would have to set forth risk-based procedures 
describing when documents, non-documentary methods, or a combination of 
both will be used. These procedures should be based on the investment 
adviser's assessment of the factors described in paragraph (a)(2) of 
the proposed rule.
    The risk that an investment adviser will not have a reasonable 
belief that it knows a customer's true identity will be heightened for 
certain types of accounts, such as accounts opened in the name of a 
corporation, partnership, or trust that is created, or conducts 
substantial business, in jurisdictions designated as primary money 
laundering concerns or designated as non-cooperative by an 
international body, or jurisdictions that are otherwise considered 
high-risk for money laundering or terrorist financing with respect to 
their compliance with relevant international standards.\38\ Obtaining 
sufficient information to verify a given customer's identity can reduce 
the risk an investment adviser will be used as a conduit for money 
laundering and terrorist financing. An investment adviser's identity 
verification procedures must be based on its assessments of the factors 
in paragraph (a)(2). Accordingly, when those assessments suggest a 
heightened risk, the investment adviser should modify its verification 
measures accordingly (e.g., by utilizing additional measures).
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    \38\ For example, the Financial Action Task Force (FATF), an 
intergovernmental body that establishes international standards for 
anti-money laundering, countering the financing of terrorism, and 
countering the financing of proliferation of weapons of mass 
destruction, issues lists of jurisdictions with strategic AML/CFT 
deficiencies, including identifying certain jurisdictions as high 
risk. FinCEN issues a press release following each FATF update to 
the lists and reminds U.S. financial institutions to apply enhanced 
due diligence proportionate to the risks for those identified as 
high-risk jurisdictions. See, e.g., Financial Action Task Force 
Identifies Jurisdictions with Anti-Money Laundering and Combating 
the Financing of Terrorism and Counter-Proliferation Deficiencies 
(Feb. 29, 2024), available at https://www.fincen.gov/news/news-releases/financial-action-task-force-identifies-jurisdictions-anti-money-laundering.
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    Section 1032.220(a)(2)(ii)(A) Customer verification through 
documents. Proposed Sec.  1032.220(a)(2)(ii)(A) would require an 
investment adviser's CIP to contain procedures that set forth the 
documents that the investment adviser will use for verification, based 
on a risk-based analysis of the types of documents that it believes 
will enable it to verify customer identities. The proposed rule 
includes a list of identification documents, though an investment 
adviser would be allowed to use other documents, provided they allow 
the investment adviser to establish a reasonable belief that it knows 
the true identity of the customer. For individuals, these documents may 
include unexpired government-issued identification evidencing 
nationality or residence and bearing a photograph or similar safeguard. 
For other persons, suitable documents would include documents showing 
the existence of the entity, such as certified articles of 
incorporation, a government-issued business license, a partnership 
agreement, or a trust instrument. The investment adviser's procedures 
must take into account circumstances in which there may be problems 
authenticating documents and the inherent limitations of certain 
documents as a means of identity verification.\39\ These limitations 
would affect the types of documents that would be necessary to 
establish a reasonable belief that the investment adviser knows the 
true identity of the customer and would require the use of non-
documentary methods in addition to documents under some circumstances.
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    \39\ Proposed 1032.220(a)(2)(ii)(B) notes examples of potential 
circumstances in which an investment adviser may encounter problems 
or limitations involving customer verification through documents, 
including circumstances in which the investment adviser is not 
familiar with the documents presented, among other potential 
circumstances.
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    Under proposed Sec.  1032.220(a)(2)(ii)(A), once an investment 
adviser obtains and verifies the identity of a customer through a 
suitable document, the investment adviser would not be required to take 
steps to determine whether a document has been validly issued. An 
investment adviser generally would be allowed to rely on an unexpired 
government-issued identification for verification purposes; \40\ 
however, if a document has indicators of fraud, the investment adviser 
would have to consider that

[[Page 44577]]

factor in determining whether it could form a reasonable belief that it 
knows the customer's true identity.\41\
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    \40\ Proposed 1032.220(a)(2)(ii)(A) notes that, for verification 
procedures relying on documents, documents may include: for an 
individual, an unexpired government-issued identification evidencing 
nationality or residence and bearing a photograph or similar 
safeguard, such as a driver's license or passport; and, for a person 
other than an individual (such as a corporation, partnership, or 
trust), documents and any amendments thereto showing the existence 
of the entity, such as certified articles of incorporation, a 
government-issued business license, a partnership agreement, or a 
trust instrument.
    \41\ If the investment adviser has a broader AML/CFT program, 
the presentation by a customer of a document showing indications of 
fraud should generally also be considered by the investment adviser 
as part of its broader AML/CFT program.
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    Section 1032.220(a)(2)(ii)(B) Customer verification through non-
documentary methods. Proposed Sec.  1032.220(a)(2)(ii)(B) would require 
an investment adviser's CIP to describe non-documentary verification 
methods and when such methods will be employed in addition to, or 
instead of, verification through documents. The proposed rule would 
permit the exclusive use of non-documentary methods because some 
accounts may be opened by telephone, mail, or over the internet in ways 
that may make sole reliance on documentary verification difficult or 
burdensome.\42\ However, even if the customer presents identification 
documents, it may be appropriate to use non-documentary methods as 
well. Under this provision, the investment adviser would be ultimately 
responsible for employing verification methods that enable the adviser 
to form a reasonable belief that it knows the true identity of the 
customer.
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    \42\ FinCEN and the SEC recognize that account opening by solely 
telephone, mail, or over the internet is unlikely in the context of 
customers that are private funds.
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    Proposed Sec.  1032.220(a)(2)(ii)(B) would set forth certain non-
documentary methods that would be suitable for verifying identity. 
These methods may include contacting a customer; obtaining a financial 
statement; comparing the identifying information obtained with respect 
to the customer against relevant fraud, bad check databases to 
determine whether any of the information is associated with known 
incidents of fraudulent behavior; comparing the identifying information 
with information available from a trusted third-party source, such as a 
credit report from a consumer reporting agency or an account 
verification database; and checking references with other financial 
institutions. This list is not intended to exhaust all methods that may 
be suitable, however. For example, the investment adviser also may wish 
to analyze whether there is logical consistency between the identifying 
information provided, such as the customer's name, street address, ZIP 
code, telephone number (if provided), date of birth, and social 
security number.
    Proposed Sec.  1032.220(a)(2)(ii)(B) also would require an 
investment adviser's CIP to address situations in which (1) an 
individual is unable to present an unexpired government-issued 
identification document that bears a photograph or similar safeguard; 
(2) the investment adviser is not familiar with the types of documents 
presented; (3) the investment adviser does not obtain documents to 
verify the identity of the customer; (4) the investment adviser does 
not meet face-to-face with a customer who is a natural person; and (5) 
the investment adviser is otherwise presented with circumstances that 
increase the risk the investment adviser will be unable to form a 
reasonable belief that it knows the true identity of a customer through 
documents.
    FinCEN and the SEC recognize that identification documents, 
including those issued by a government entity, may be obtained 
illegally and may be fraudulent. In light of the recent increase in 
identity theft, investment advisers would be encouraged to use non-
documentary methods as well, even when an investment adviser has 
received identification documents from the customer. Additionally, 
investment advisers are encouraged to consider using both documentary 
and non-documentary verification methods and should consider on a 
regular basis whether their procedures for identity verification are 
appropriate.
    Section 1032.220(a)(2)(ii)(C) Additional verification for certain 
customers. Proposed Sec.  1032.220(a)(2)(ii)(C) would require that an 
investment adviser's CIP address circumstances in which, based on the 
investment adviser's risk assessment of a new account opened by a 
customer that is not an individual, the investment adviser will obtain 
information about individuals with authority or control over such 
accounts in order to verify the customer's identity. This requirement 
would apply only when the investment adviser cannot verify the true 
identity of a customer that is not an individual using the verification 
methods described in paragraphs (a)(2)(ii)(A) and (B) of the proposed 
rule.\43\
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    \43\ An investment adviser need not undertake any additional 
verification methods with respect to a potential customer in this 
circumstance if it chooses not to permit the potential customer to 
open an account. However, the adviser may decide to collect such 
information if it were to file a SAR regarding the potential 
customer.
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    While investment advisers may be able to verify the majority of 
customers adequately through the documentary or non-documentary 
verification methods described above, there may be circumstances when 
the investment adviser cannot form a reasonable belief that it knows 
the true identity of a customer using such methods. The risk that the 
investment adviser will not know the customer's true identity may be 
heightened for certain types of accounts, such as an account opened in 
the name of a corporation, partnership, or trust that is created or 
conducts substantial business in a jurisdiction that has been 
designated by the United States as a primary money laundering concern 
or by an international body as non-cooperative, or jurisdictions that 
are otherwise considered high-risk for money laundering or terrorist 
financing with respect to their compliance with relevant international 
standards. As a result of this, FinCEN and the SEC are proposing to 
require (1) that an investment adviser identify customers that are not 
individuals that pose a heightened risk of not being properly 
identified and (2) that an investment adviser's CIP prescribe 
additional measures that may be used to obtain information about 
individuals with authority or control over the account to verify the 
customer's identity when standard documentary or non-documentary 
methods prove to be insufficient.
    Section 1032.220(a)(2)(iii) Lack of verification. Proposed Sec.  
1032.220(a)(2)(iii) would require that an investment adviser's CIP 
include procedures for responding to circumstances in which the 
investment adviser cannot form a reasonable belief that it knows the 
true identity of a customer. These procedures should describe (1) when 
the investment adviser should not open an account, (2) the terms under 
which the investment adviser may provide advisory services to the 
customer while the investment adviser attempts to verify the customer's 
identity, (3) when the investment adviser should close an account after 
attempts to verify a customer's identity fail, and (4) when the 
investment adviser should file a SAR in accordance with applicable law 
and regulation.\44\
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    \44\ Although investment advisers are not currently required to 
file SARs, they are encouraged to do so voluntarily. As noted at 
n.7, supra, on Feb. 15, 2024, Treasury issued the AML/CFT Program 
and SAR Proposed Rule, which, if adopted, would require investment 
advisers to file SARs in certain circumstances.
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    Section 1032.220(a)(3) Recordkeeping. Proposed Sec.  1032.220(a)(3) 
would require that an investment adviser's CIP include procedures for 
making and maintaining a record of information obtained under 
procedures implementing proposed paragraph (a), as discussed in greater 
detail in the following paragraphs. This

[[Page 44578]]

proposal is consistent with the requirement of 31 U.S.C. 5318(l)(2)(B) 
that CIPs include procedures for maintaining records of the information 
used to verify a person's identity, including name, address, and other 
identifying information.
    Section 1032.220(a)(3)(i) Required records. Proposed Sec.  
1032.220(a)(3)(i) would require that an investment adviser's CIP 
include procedures for making and maintaining records related to 
verifying customer identity, as well as procedures for how to do so. 
Records would have to include the identifying information about each 
customer under proposed (a)(2)(i) and a description of any document 
that the investment adviser relied on to verify the identity of the 
customer (noting the document type, any identification number contained 
therein, the place of issuance, and the date of issuance and expiration 
as applicable and relevant) under proposed (a)(3)(i)(B). Proposed Sec.  
1032.220(a)(3)(i)(C) would require records to include a description of 
the methods and results of any measures undertaken to verify the 
identity of the customer. This description would include any relevant 
non-documentary methods and additional verification for certain 
customers used to verify identity under proposed Sec.  
1032.220(a)(2)(ii)(B) and (C). Finally, proposed Sec.  
1032.220(a)(3)(i)(D) would require investment advisers to record a 
description of the resolution of each substantive discrepancy 
discovered when verifying the identifying information obtained.
    An investment adviser would be allowed to use electronic records to 
satisfy the requirements of this proposed rule.
    Section 1032.220(a)(3)(ii) Record retention. Proposed Sec.  
1032.200(a)(3)(ii) would prescribe a bifurcated record retention 
schedule that is consistent with a general five-year retention 
requirement. Under this proposed provision, an investment adviser would 
be required to retain the information obtained about a customer 
pursuant to proposed paragraph (a)(3)(i)(A) (i.e., identifying 
information about the customer) while the account remains open and for 
five years after the date the account is closed.\45\ The remaining 
records required under proposed paragraphs (a)(3)(i)(B), (C), and (D) 
(i.e., information regarding the verification of a customer's 
identity), however, would only have to be retained for five years after 
the record is made.
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    \45\ The proposed five-year period is generally consistent with 
the retention period under the Advisers Act books and records rule, 
which generally requires most books and records to be retained for 
five years from the last day of the fiscal year in which the last 
entry was made on the document or the document was disseminated. See 
Advisers Act Rule 204-2 codified at 17 CFR 275.204-2. Advisers may 
be required to keep certain records for longer periods under the 
books and records rule.
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    Section 1032.220(a)(4) Comparison with Government Lists. Under 31 
U.S.C. 5318(l)(2)(C), a CIP must include reasonable procedures for 
determining whether a customer appears on any list of known or 
suspected terrorists or terrorist organizations provided by any 
government agency. Proposed Sec.  1032.220(a)(4) accordingly would 
require that an investment adviser's CIP include reasonable procedures 
for determining whether a customer appears on any such list provided by 
any Federal Government agency that is designated as such by Treasury in 
consultation with the Federal functional regulators, and that an 
investment adviser make such a determination within a reasonable period 
of time after the account is opened, or earlier if required by another 
Federal law, regulation, or directive issued in connection with the 
applicable list. This requirement would apply only with respect to 
lists circulated, directly provided, or otherwise made available by the 
Federal government and designated as such by Treasury in consultation 
with the Federal functional regulators. In addition, proposed Sec.  
1032.220(a)(4) would state that the procedures must require investment 
advisers to follow all Federal directives issued in connection with 
such lists. Because Treasury and the Federal functional regulators have 
not yet designated any such lists for the purposes of CIP, the proposed 
rule cannot be more specific with respect to the lists that investment 
advisers must check. However, investment advisers would not have an 
affirmative duty under this rule to seek out all lists of known or 
suspected terrorists or terrorist organizations compiled by the Federal 
government. Instead, investment advisers would receive separate 
notification regarding the lists that they must consult for purposes of 
this provision.
    Many investment advisers already have procedures for determining 
whether customers' names appear on some federal government lists, 
including lists that identify known terrorists and terrorist 
organizations. For example, under current law, there are substantive 
legal requirements associated with the lists circulated by Treasury's 
Office of Foreign Assets Control (``OFAC''). Failure to comply with 
these requirements may result in criminal or civil penalties.
    Section 1032.220(a)(5) Customer Notice. Section 5318(l)(2) also 
provides that financial institutions must give their customers adequate 
notice of their identity verification procedures. Therefore, proposed 
Sec.  1032.220(a)(5) would require that an investment adviser's CIP 
include procedures for providing customers with adequate notice that 
the firm is requesting information to verify their identities. The 
proposed rule would state that this notice is adequate if the 
investment adviser generally describes the identification requirements 
of the proposed rule and provides such notice in a manner reasonably 
designed to ensure that a prospective customer is able to view the 
notice, or is otherwise given notice, before opening an account. Under 
proposed Sec.  1032.220(a)(5), depending on how an account is opened, 
an investment adviser could post a notice on its website, include the 
notice in its account applications, or use any other form of written or 
oral notice.\46\ The sample notice included in the proposed rule, if 
appropriate, would be deemed adequate notice to an investment adviser's 
customers when provided in accordance with the other requirements 
described in this section.
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    \46\ For example, if an account is opened electronically, such 
as through an internet website, the investment adviser may provide 
notice electronically.
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    Section 1032.220(a)(6) Reliance on another financial institution. 
There may be circumstances in which an investment adviser could rely on 
the performance by another financial institution of some or all of the 
elements of the investment adviser's CIP. However, the investment 
adviser would remain responsible for ensuring compliance with the 
proposed rule 1032.220(a)(6), and therefore would be required to 
actively monitor the operation of its CIP and assess its effectiveness. 
Proposed Sec.  1032.220(a)(6) would provide that an investment 
adviser's CIP may include procedures that specify when the investment 
adviser will rely on the performance by another financial institution 
(including an affiliate) of any procedures of the investment adviser's 
CIP, and thereby satisfy the investment adviser's obligations under the 
proposed rule. Under proposed Sec.  1032.220(a)(6), reliance would be 
permitted if a customer of the investment adviser is opening an account 
or has opened or has established an account or similar business 
relationship with the other financial institution to provide or engage 
in services, dealings, or other financial transactions, provided that: 
(1)

[[Page 44579]]

such reliance is reasonable under the circumstances, (2) the other 
financial institution is subject to a rule implementing the AML/CFT 
compliance program requirements of 31 U.S.C. 5318(h) and is regulated 
by a Federal functional regulator, and (3) the other financial 
institution enters into a contract with the investment adviser 
requiring it to certify annually to the investment adviser that it has 
implemented an AML/CFT program and will perform (or its agent will 
perform) the specified requirements of the investment adviser's CIP. 
This last element could be satisfied by a reliance letter or other 
similar documentation. The investment adviser would not be held 
responsible for the failure of the other financial institution to 
fulfill adequately the adviser's CIP responsibilities, provided that 
the investment adviser can establish that its reliance was reasonable 
and that it has obtained the requisite contracts and certifications. 
The SEC and FinCEN emphasize that the investment adviser and the other 
financial institution upon which it relies would have to satisfy all of 
the conditions set forth in this proposed rule. If they do not, then 
the investment adviser would remain solely responsible for applying its 
own CIP to each customer in accordance with this rule.\47\
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    \47\ Pursuant to a Securities Industry and Financial Markets 
Association (SIFMA) no-action letter, staff of the SEC's Division of 
Trading and Markets stated that it would not recommend enforcement 
action if a broker-dealer relies on an RIA to perform some or all 
aspects of the broker-dealer's CIP obligations or the portion of 
customer due diligence 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. Letter to Mr. Bernard V. Canepa, Associate General 
Counsel, 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), available at https://www.sec.gov/files/nal-sifma-120922.pdf (SIFMA No-Action Letter). This no-action letter 
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.
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    Section 1032.220(b) Exemptions. Proposed Sec.  1032.220(b) would 
provide that the SEC, with the concurrence of the Secretary, may by 
order or regulation exempt any investment adviser or any type of 
account from the requirements of this section. Proposed Sec.  
1032.220(b) would also provide that the Secretary, with the concurrence 
of the Commission, may exempt any investment adviser or any type of 
account from the requirements of this section. In issuing such 
exemptions, the SEC and the Secretary would have to consider whether 
the exemption is consistent with the purposes of the BSA and in the 
public interest, and they may consider other necessary and appropriate 
factors.
    Section 1032.220(c) Effective Date. FinCEN and SEC anticipate that 
the effective date of the proposed rule will be 60 days after the date 
on which the final rule is published in the Federal Register. In order 
to provide time for investment advisers to come into compliance, 
section 1032.220(c) states the compliance 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 a CIP that complies with the requirements of this 
section on or before six months from the effective date of the 
regulation, but no sooner than the compliance date of the AML/CFT 
Program and SAR Proposed Rule, if adopted. We believe that six months 
strikes an appropriate balance between providing advisers with 
sufficient time to develop and implement a CIP while not overly 
delaying CIP implementation across the investment adviser industry.
    Section 1032.220(d) Other requirements unaffected. The proposed 
rule would include a provision, proposed Sec.  1032.220(d), parallel to 
that in CIP rules previously adopted for other financial institutions, 
stating that nothing in the rule shall be construed to relieve an 
investment adviser of its obligations to comply with any other 
provision of this chapter, including provisions concerning information 
that must be obtained, verified, or maintained in connection with any 
account or transaction.\48\
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    \48\ See, e.g., 31 CFR 1020.220(c), 1023.220, 1024.220, 
1026.220.
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III. Request for Comments

    FinCEN and the SEC invite comment on all aspects of the proposed 
regulation, and specifically seek comment on the following issues:
    1. Whether the proposed definition of ``account'' is appropriate 
and unambiguous, and whether other examples of accounts should be added 
to the rule text.
    a. Should an account opened for the purpose of participating in an 
employee benefit plan established under ERISA be excluded from the CIP 
account definition?
    b. Are there types of accounts that should be exempted from CIP 
obligations?
    2. The proposed definition of ``account'' would exclude an account 
that an investment adviser acquires through an acquisition, merger, 
purchase of assets, or assumption of liabilities, given that customers 
do not ``open'' transferred accounts, and, therefore, the accounts do 
not fall within the scope of section 326. As discussed above, advisers 
may be required to apply other sanctions and export compliance and AML/
CFT requirements to those accounts. Are there circumstances in which 
advisers should be required to fulfill identity verification 
requirements for some transfers?
    a. Should the rule require advisers to re-verify a customer's 
identity after a certain period of time (e.g., every year, every other 
year, or every five years)?
    3. Should the definition of ``account'' refer to the activities 
enumerated in 15 U.S.C. 80b-2(a)(11) for the definition of investment 
adviser? Or is the reference to ``investment advisory services'' 
sufficient?
    4. Is the proposed definition of ``customer'' appropriate? Should 
other examples of customers be added to the rule text?
    5. 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), as proposed? What would 
be the logistical challenges of this approach?
    6. Should terms defined elsewhere within 31 CFR chapter X, such as 
``U.S. Person'', ``Non-U.S. Person'', and ``Taxpayer Identification 
Number'' be defined in the proposed rule as well or are those terms 
well-understood for CIP purposes?
    7. To what extent do RIAs and ERAs already require customer 
identification and verification or otherwise have procedures in the 
manner proposed in the course of regular business or under other, 
existing regulatory obligations?
    a. To what extent do the customer identification and verification 
procedures currently implemented by RIAs and ERAs resemble or differ 
from those required by the proposed rule?
    8. Are there other categories of entities that, like mutual funds, 
should be exempted from an investment adviser's CIP program. Why or why 
not?
    9. 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 CIP 
obligations?

[[Page 44580]]

    10. Should closed-end registered funds, wrap fee programs, or other 
types of accounts advised by investment advisers be, on a risk-basis, 
exempted from an investment adviser's CIP program?
    11. FinCEN also requests comment on the money laundering, terrorist 
financing, and other illicit finance risks faced by closed-end funds, 
and how entities with existing CIP requirements, such as banks and 
broker-dealers, apply those requirements to activity involving closed-
end funds.
    12. How would an investment adviser apply the identification and 
verification requirements at proposed Sec.  1032.220(a)(2) to a private 
fund customer? What type of information would the adviser use to ask 
identification questions? We expect that advisers would likely already 
have this information in respect of private funds that they manage. Do 
commenters agree?
    13. Proposed Sec.  1032.220(a)(2) would require that an investment 
adviser verify customer identity within a reasonable time before or 
after the customer's account is opened. To what extent would an 
investment adviser provide advisory services prior to verifying 
customer identity? How much time would an investment adviser reasonably 
need to verify customer identity (e.g., 30 days)?
    14. How do investment advisers currently collect identity 
information for non-U.S. customers that are not individuals, such as 
foreign legal entities or other legal persons and legal arrangements?
    15. Are the provisions in section 1032.220(a)(6) sufficient to 
permit an adviser to rely on another financial institution to perform 
its CIP requirements? Would there be any challenges for advisers with 
the proposed approach? Do commenters agree that an investment adviser 
should be required to actively monitor the operation of its CIP and 
assess its effectiveness in order to rely on another financial 
institution, or should the adviser not be held responsible by showing 
it reasonably relied on another financial institution that satisfied 
all of the conditions set forth in this proposed rule?
    16. Is the proposed requirement for the other financial institution 
to enter into a contract with the investment adviser feasible? Does it 
depend on the size of the investment adviser and its negotiating power? 
Should we modify this requirement? For example, should we remove or 
modify the requirement for the other financial institution to certify 
that it will perform specified requirements of the investment adviser's 
CIP?
    17. Does the proposed compliance date (six months after the final 
rule is issued) give advisers sufficient time to comply with the 
requirements of the proposed rule? Should the compliance date be 
staggered based on adviser size?
    18. If an investment adviser cannot form a reasonable belief that 
it knows the true identity of a customer, should the investment adviser 
be able to engage in advisory activities on behalf of the customer 
prior to verifying the customer's identity?

IV. Analysis of the Costs and Benefits Associated With the Proposed 
Rule

A. Introduction

    FinCEN \49\ and the SEC are sensitive to the economic effects that 
could result from the proposed rule and have accordingly considered 
certain likely effects and reasonable alternatives. Section 326 of the 
USA PATRIOT Act requires Treasury to prescribe regulations setting 
forth minimum standards for financial institutions regarding the 
identities of customers when they open an account. It also provides 
that the regulations issued by Treasury and the SEC must, at a minimum, 
require financial institutions to implement reasonable procedures for: 
(1) verification of the identity of any person seeking to open an 
account, to the extent reasonable and practicable; (2) maintenance of 
the information used to verify the person's identity, including name, 
address, and other identifying information; and (3) consulting lists of 
known or suspected terrorists or terrorist organizations provided to 
the financial institution by any government agency to determine whether 
a person seeking to open an account appears on any such list.\50\
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    \49\ When proposing a rule, FinCEN must conduct a regulatory 
impact analysis in accordance with Executive Orders 12866, 13563, 
and 14094 (E.O. 12866 and its amendments) comprised of a number of 
assessments of the anticipated impacts of the proposed rule in terms 
of its expected costs and benefits to affected parties. The 
regulatory impact analysis must also include 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 an assessment under the Unfunded 
Mandates Reform Act of 1995 (UMRA).
    \50\ 31 U.S.C. 5318(l)(2). In addition to the requirements in 
proposed 31 CFR 1032.220, FinCEN and the SEC are also proposing to 
revise 31 CFR 1032.100 to define several terms used in proposed 
1032.220. This aspect of the proposed rule has no independent 
substantive requirements or economic impacts.
---------------------------------------------------------------------------

    Under the BSA, FinCEN recently published the AML/CFT Program and 
SAR Proposed Rule, which would include certain investment advisers in 
the definition of financial institutions.\51\ If that rule is adopted 
and ``investment adviser'' is thereby added to FinCEN's definition of 
``financial institution'' at 31 CFR 1010.100(t), covered investment 
advisers would be financial institutions for purposes of section 326. 
As a consequence, FinCEN and the SEC would be required to jointly 
prescribe rules that establish minimum standards for covered investment 
advisers regarding the identities of customers when they open an 
account, which are proposed in this release.\52\ This proposed rule is 
designed to align the requirements for investment advisers with 
existing rules for other financial institutions, such as broker-
dealers, mutual funds, credit unions, banks, and others, to adopt and 
implement CIPs.
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    \51\ 89 FR 12108 (Feb. 15, 2024).
    \52\ USA PATRIOT Act, sec. 326(a)(4).
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B. Broad Economic Considerations

    Evaluating the effectiveness of AML/CFT regimes is difficult 
because there is no precise method to determine either the actual 
number or magnitude of money laundering and terrorism financing crimes 
that occur, since some of these crimes go undetected. In addition, it 
is impossible to infer either the number or magnitude of such crimes 
that would have occurred absent the regime or under some alternative 
enforcement regime. To our knowledge, there are no academic studies 
that specifically assess the efficacy of CIP provisions as a part of 
AML/CFT regimes. However, there is some empirical evidence that points 
toward the effectiveness of the U.S. AML/CFT regime more broadly.\53\
---------------------------------------------------------------------------

    \53\ See, e.g., S.D. Jayasekara, How Effective Are The Current 
Global Standards In Combating Money Laundering and Terrorist 
Financing?, 24 J. Money Laundering Control (2021). The author finds 
that countries whose regulations more closely adhere to Financial 
Action Task Force standards are less likely to see proxies for 
money-laundering related activities such as bribes, corruption, and 
crime. See also J. Jiao, Bank Secrecy Act and Casinos' Performances, 
19 J. Acct. Fin. (2019). The author finds that the accounting and 
market performance of casinos in Nevada converge after the adoption 
of the BSA, indicating that casinos engage in less money laundering. 
Further, the market performance of these casinos improves, which is 
consistent with a positive overall economic impact of the BSA on 
that industry. However, casinos and some other financial 
institutions with AML/CFT program requirements do not have CIP 
requirements. See 31 CFR 1021.210, 1022.210, 1028.210. Some academic 
work disputes the theoretical effectiveness of FATF frameworks with 
which the U.S. regime largely aligns: See R.F. Pol, Anti-money 
laundering effectiveness: assessing outcomes or ticking boxes?, 21 
J. Money Laundering Control (2018).
---------------------------------------------------------------------------

    The scale of money laundering in the United States is large. 
Specifically, in fiscal year 2022, offenders in 1,001 money laundering 
cases were sentenced

[[Page 44581]]

in the Federal system according to the United States Sentencing 
Commission (``USSC'').\54\ These cases involved a median loss of 
approximately $300,000 and approximately 17.3 percent of these cases 
involved a loss of greater than $1.5 million.\55\ USSC does not provide 
data that would allow us to determine what percentage of these offenses 
involved investment advisers. However, a Treasury-led review of SARs 
filed between 2013 and 2021 found that approximately 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.\56\ Further, the number of SAR 
filings where an RIA or ERA was referenced increased by approximately 
400 percent between 2013 and 2021--a disproportionately higher increase 
than the overall increase in SAR filings during that time, which was 
approximately 140 percent.\57\
---------------------------------------------------------------------------

    \54\ USSC, Quick Facts--Money Laundering Offenses (2022), 
available at https://www.ussc.gov/sites/default/files/pdf/research-and-publications/quick-facts/Money_Laundering_FY22.pdf. The USSC is 
a bipartisan, independent agency located in the judicial branch of 
the U.S. government; and, as part of its mission, it collects, 
analyzes, and distributes a broad array of information on federal 
sentencing practices, serving as an information resource for 
Congress, the executive branch, the courts, criminal justice 
practitioners, the academic community, and the public.
    \55\ Id.
    \56\ Investment advisers were not (and are not currently) 
required to file SARs during the period of analysis, 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. Investment advisers may also be 
identified in SARs filed by other entities. SARs may also be related 
to suspicious activity unrelated to money laundering.
    \57\ See 89 FR at 12114 n.70 and associated text.
---------------------------------------------------------------------------

    According to Treasury, in its 2024 National Money Laundering Risk 
Assessment (``NMLRA''), ``[m]oney laundering enables criminal activity 
and is necessary to disguise ill-gotten gains. It facilitates crime, 
distorts markets, and has a devastating economic and social impact on 
citizens. It also threatens U.S. national security as money laundering 
allows drug traffickers, fraudsters, human trafficking organizations, 
and corrupt officials, to operate and expand their criminal 
enterprises.'' \58\ Money laundering distorts markets because the 
incentives for criminals' use of the financial system differ from those 
of the broader market. Illicit funds also have a probability of seizure 
that could negatively impact the broader market, as it could increase 
the rate of return investors demand as compensation for risk and thus 
firms' cost of capital.\59\
---------------------------------------------------------------------------

    \58\ Treasury, 2024 National Money Laundering Risk Assessment 
(Feb. 2024) at 1, available at home.treasury.gov/system/files/136/2024-National-Money-Laundering-Risk-Assessment.pdf.
    \59\ As an investment's risk increases, investors typically 
require a higher rate of return to invest in it. See also infra 
section E for a detailed description for how money laundering can 
affect efficiency in financial markets.
---------------------------------------------------------------------------

    Money laundering also provides the appearance of legitimacy to 
proceeds of international corruption. By requiring that investment 
advisers verify the identity of their customers, the proposed rule 
would make it more difficult for money launderers to use investment 
advisers as an entry point into the U.S. financial system, reducing 
money launderers' ability to launder the proceeds of these criminal 
enterprises and thereby decreasing incentives to engage in these 
crimes. It would also help address the illicit finance risks identified 
in NMLRA.\60\ As a result, the proposed rule would reduce both monetary 
as well as nonmonetary costs associated with money laundering involving 
investment advisers.\61\
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    \60\ See infra note 63 and associated text.
    \61\ The economic considerations enumerated here have all been 
evaluated for investment advisers of different characteristics, 
particularly both large and small advisers. Small investment 
advisers have just as much exposure as large ones to the risks of 
money laundering, financing of terrorism, or movement of funds for 
other illicit purposes since criminals may seek to place their funds 
at financial institutions with less sophisticated risk management 
capabilities.
---------------------------------------------------------------------------

    Given the overall scale of money laundering in the United States, 
preventing cases involving investment advisers could have substantial 
benefits. The NMLRA, has identified several vulnerabilities facing 
investment advisers and highlights some cases involving investment 
advisers.\62\ The NMLRA cites ERAs, RIAs that are not dually registered 
as or affiliated with a bank or broker-dealer, and investment advisers 
managing private funds as the highest-risk types of investment 
advisers.\63\
---------------------------------------------------------------------------

    \62\ Supra note 58 pp. 85-88.
    \63\ Id. at 87.
---------------------------------------------------------------------------

    AML/CFT regimes can lower the amount of money laundering that 
occurs by creating barriers to these transactions. Economic theory 
would suggest that as more entities and transactions are subject to an 
AML/CFT regime, the deterrent effect of any particular regulation will 
increase: Illicit dollars attempting to access U.S. financial markets 
will seek entry via methods that are outside of, or at the weakest 
point of, an AML/CFT regime. As the number of possible entryways 
shrinks, these illicit dollars would be funneled into fewer and fewer 
channels. As the difficulty of laundering illicit dollars thus 
increases, the marginal cost of using these channels increases at an 
accelerated rate, further deterring their use. In targeting money 
laundering involving customers of investment advisers, the proposed 
rule thus seeks to fill a current gap in the U.S. AML/CFT regime, as 
recognized by the Financial Action Task Force (``FATF'').\64\
---------------------------------------------------------------------------

    \64\ FATF is an intergovernmental agency, of which the United 
States is a member, that was established to promote effective 
policies to combat money laundering and other financial crimes. See 
FATF, Anti-Money Laundering and Counter-Terrorist Financing 
Measures--United States, 3rd Enhanced Follow-up Report & Technical 
Compliance Re-Rating (Mar. 2020), available at https://www.fatf-gafi.org/content/dam/fatf-gafi/fur/Follow-Up-Report-United-States-March-2020.pdf.
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C. Economic Baseline

    The baseline against which the costs, benefits, and the effects on 
efficiency, competition, and capital formation of the proposed rule are 
measured consists of the current U.S. AML/CFT statutory framework, its 
regulatory implementation, and current AML/CFT practices of investment 
advisers and their related parties.
1. Regulatory Baseline
    The AML statutory framework in the United States is commonly known 
as the BSA.\65\ Under this framework, many types of financial 
institutions currently are required to enact AML programs that include 
a CIP. The SEC has jointly enacted rules with FinCEN that specifically 
impose CIP requirements on broker-dealers and mutual funds.\66\
---------------------------------------------------------------------------

    \65\ 31 U.S.C. 5311 et seq.
    \66\ In this section, ``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 section 
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).
---------------------------------------------------------------------------

    While investment advisers are not currently defined as financial 
institutions under the BSA and are not subject to CIP requirements, 
certain investment advisers already perform AML/CFT functions, 
including those associated with a CIP, as a result of existing 
requirements.\67\ Specifically,

[[Page 44582]]

some RIAs and ERAs may perform certain AML/CFT functions, including 
those associated with a CIP, if the entity is also a registered broker-
dealer or a bank (i.e., a dual registrant), or is an operating 
subsidiary of a bank; other investment advisers are affiliates of banks 
or broker-dealers, which may implement an enterprise-wide CIP-compliant 
AML/CFT program that would include investment advisers. Some investment 
advisers perform these functions via contract with a broker-dealer 
(e.g., if the investment adviser performs CIP functions for joint 
customers) or other financial institutions.
---------------------------------------------------------------------------

    \67\ See 89 FR at 12112 (circumstances where some investment 
advisers implement AML/CFT measures).
---------------------------------------------------------------------------

    In addition, certain investment advisers already obtain identifying 
information with respect to some accounts or customers. For example, 
U.S. investment advisers, like all U.S. persons, must comply with OFAC 
sanctions and U.S. export controls, so they are prohibited from 
engaging in transactions that violate foreign economic and trade 
sanctions and export controls imposed by the U.S. government and may 
engage in due diligence to ensure that they remain compliant with such 
sanctions and export controls.\68\ As another example, advisers may be 
subject to non-U.S. AML and CIP laws, such as those applicable to 
private funds organized in the Cayman Islands.\69\
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    \68\ For instance, OFAC's Framework for Compliance Commitments 
note that ``One of the fundamental components of an effective OFAC 
risk assessment and [sanctions compliance program] is conducting due 
diligence on an organization's customers, supply chain, 
intermediaries, and counter-parties.'' OFAC, A Framework for 
Compliance Commitments (May 2019), available at https://ofac.treasury.gov/media/16331/download?inline.
    \69\ See The Cayman Islands Private Funds Act (2021 Revision) 
and associated regulations.
---------------------------------------------------------------------------

    Since the USA PATRIOT Act was passed, multiple rules have been 
proposed that would have required some investment advisers to apply 
AML/CFT requirements. While the substantive requirements contained in 
these proposals are not part of the baseline for the present 
rulemaking, some investment advisers have developed AML/CFT measures 
consistent with these prior proposals, as discussed in the next 
section. Specifically, on September 26, 2002, FinCEN published an NPRM 
proposing to require that unregistered investment companies, to include 
private funds, establish AML programs.\70\ This was followed by the May 
5, 2003, NPRM proposing to require certain investment advisers to 
establish AML programs.\71\ 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'').\72\ 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, but would not have included ERAs in the 
scope of the rule nor would it have established minimum CIP 
requirements.
---------------------------------------------------------------------------

    \70\ See FinCEN, Anti-Money Laundering Programs for Unregistered 
Investment Companies, 67 FR 60617 (Sept. 26, 2002).
    \71\ See FinCEN, Anti-Money Laundering Programs for Investment 
Advisers, 68 FR 23646 (May 5, 2003).
    \72\ See FinCEN, Anti-Money Laundering Program and Suspicious 
Activity Report Filing Requirements for Registered Investment 
Advisers, 80 FR 52680 (Sept. 1, 2015).
---------------------------------------------------------------------------

    Some financial institutions are required to establish a CIP that 
would include procedures for determining whether a customer appears on 
lists of known or suspected terrorists or terrorist organizations 
issued by any Federal government agency and designated as such by 
Treasury in consultation with the Federal functional regulators.\73\ 
While no such lists have been designated by Treasury for any financial 
institution, our understanding is that some financial institutions, 
including some investment advisers, already check their customers 
against OFAC's Specially Designated Nationals and Blocked Persons List 
(``SDN List'').\74\
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    \73\ See 31 CFR 1020.220(a)(4), 1023.220(a)(4), 1024.220(a)(4), 
1026.200(a)(4).
    \74\ See, e.g., Managed Funds Association Sound Practices for 
Hedge Fund Manager, at n.15 and accompanying text (2009), available 
at https://www.mfaalts.org/wp-content/uploads/2011/06/Final_2009_complete.pdf.
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2. Market Practice
    While not legally required, some investment advisers currently have 
voluntary AML/CFT programs, which may be CIP-compliant.\75\ Investment 
advisers also collect identifying information to perform operational 
tasks such as distinguishing between customer accounts, or contacting 
their customers for the purposes of sending administrative, regulatory, 
or other notices.
---------------------------------------------------------------------------

    \75\ See note 68.
---------------------------------------------------------------------------

    The 2016 Investment Management Compliance Testing Survey (``2016 
IMCTS Survey'') collected information from approximately 700 RIAs on 
their existing implementation of AML/CFT measures.\76\ According to 
this survey, as of 2016, approximately 40 percent of RIAs had already 
adopted AML/CFT policies consistent with the Second Proposed Investment 
Adviser Rule. An additional 36 percent of RIAs adopted some AML/CFT 
policies and procedures, but those were generally not in line with the 
Second Proposed Investment Adviser Rule. Therefore, according to the 
2016 IMCTS Survey, approximately 76 percent of RIAs have at least some 
AML/CFT measures in place. In particular, 49 percent had annual 
employee AML/CFT training, 24 percent had a designated AML/CFT 
compliance officer, and 40 percent performed independent testing of 
their AML/CFT program annually. Similar information was not available 
for ERAs. While this survey did not ask a question about CIPs 
specifically, it is possible that some advisers did have a CIP as part 
of their AML/CFT policies and procedures.
---------------------------------------------------------------------------

    \76\ See 89 FR 12145 n.239 and associated text. 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.
---------------------------------------------------------------------------

    Some investment advisers currently outsource some or all of the 
work needed for investment advisers or other parties to comply with 
regulatory requirements.\77\ A variety of third-party firms (e.g., fund 
administrators) exist that assist investment advisers in complying with 
their regulatory responsibilities and contractual obligations.
---------------------------------------------------------------------------

    \77\ The 2023 Investment Management Compliance Testing Survey, 
which surveys RIAs, found that 38% of those surveyed use a third 
party to perform compliance functions, available at https://www.investmentadviser.org/wp-content/uploads/2023/07/IMCT-Final-Report.pdf.
---------------------------------------------------------------------------

3. Affected Parties
    As of October 5, 2023, there were 14,914 RIAs, with roughly $114 
trillion assets under management and 931,000 employees.\78\ There were 
also 5,546 ERAs with additional gross assets of $5.2 trillion (ERAs do 
not report the number of employees).\79\ RIAs had

[[Page 44583]]

approximately 51.5 million natural person customers and 2.9 million 
legal entity customers.\80\
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    \78\ This number is an estimate of all registered investment 
advisers with at least one client based on responses to Item 5.D of 
Form ADV, as of Oct. 5, 2023. We note that this figure is likely an 
overestimate because Form ADV does not allow us to separate advisers 
to only open-end investment companies, which generally would be 
excluded from this proposed rule since an investment adviser may 
deem the requirements satisfied for any mutual fund (as defined in 
31 CFR 1010.100(gg)) it advises that has developed and implemented a 
CIP compliant with the CIP requirements applicable to mutual funds, 
from advisers to closed-end investment companies, which would be 
included.
    \79\ The number of RIAs and ERAs, their assets under management, 
and RIA employees are estimated using Form ADV data, as of Oct. 5, 
2023. 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.
    \80\ Estimated from Form ADV data, as of Oct. 5, 2023.
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D. Benefits and Costs

1. Benefits
    The provisions added to the BSA from section 326 of the USA PATRIOT 
Act facilitate the prevention, detection, and prosecution of money 
laundering and the financing of terrorism. Section 326 requires 
financial institutions to establish CIP programs. If the AML/CFT 
Program and SAR Proposed Rule is adopted, investment advisers will be 
financial institutions under the BSA and in such event the BSA would 
require specifying how an investment adviser is to establish and 
execute a CIP program.
    Obtaining and verifying the identity of account holders or 
responding to circumstances in which the investment adviser cannot form 
a reasonable belief that it knows the true identity of a customer would 
reduce the risk of terrorists and other criminals accessing U.S. 
financial markets to launder money, finance terrorism, or move funds 
for other illicit purposes. Comparing customer identities to those on 
government lists of known or suspected terrorists or terrorist 
organizations would assist investment advisers in identifying and 
preventing criminal activity.\81\ Maintaining records would enhance 
investment advisers' internal compliance efforts and aid investment 
advisers in detecting and taking measures to prevent potential illegal 
activity and in identifying customers who have newly been added to such 
government lists. For example, in the event that an investment 
adviser's customer is flagged by screening software, maintaining 
records as required by the proposed rule would assist investment 
advisers in determining whether this flag was a false positive or 
whether the customer was truly added to a relevant government list. 
Establishing a CIP would help investment advisers systematize, and in 
some cases automate, practices that would facilitate detection of 
attempted financial crimes and would help ensure that investment 
advisers have practices that are as effective as possible at deterring 
financial crimes.
---------------------------------------------------------------------------

    \81\ See infra section IV.D.2.c for caveats related to the 
likely costs of this provision which also apply to the benefits.
---------------------------------------------------------------------------

    In circumstances where investment advisers are or could be 
performing CIP activities for certain entities that already have CIP 
obligations, the obliged entities (such as banks and broker-dealers) 
may not necessarily have a direct relationship with the customer. In 
such cases, investment advisers may be able to more efficiently perform 
CIP obligations such as collecting the required information from these 
customers because they have a more direct relationship with these 
customers. The proposed rule would aim to harmonize investment adviser 
CIP obligations with those of other obliged entities, which could 
enhance the benefits to the public and reduce the total costs imposed 
on the industry of these CIP obligations since investment advisers and 
other obliged financial institutions can decide by contract which party 
is most efficiently able to execute the CIP and the current disparity 
in CIP requirements may be distorting these negotiations. To the extent 
that investment advisers already have practices consistent with the 
requirements of the proposed rule either because of these extant 
obligations or for operational efficiency,\82\ the benefits of the 
proposed rule described above would be mitigated.
---------------------------------------------------------------------------

    \82\ See supra section IV.C.1 and 2.
---------------------------------------------------------------------------

    The proposed rule would only require investment advisers to collect 
and verify the identity of customers that directly open and hold 
accounts (as defined in the proposed rule) with the adviser. The 
proposed rule's benefits would thus only apply in cases of money 
laundering activity involving those customers and not other individuals 
or entities. For example, an investment adviser may have a private fund 
as a customer. In this case, the proposed rule would require that the 
investment adviser collect the identifying information of the private 
fund and, in some cases, individuals with authority or control over 
such private fund,\83\ but not that of those invested in such fund. In 
certain contexts, an investment adviser may itself be the individual 
with authority or control over the private fund.
---------------------------------------------------------------------------

    \83\ The adviser would be required to obtain information about 
individuals with authority or control over the account only when the 
adviser cannot verify the true identity of a customer that is not an 
individual using the documentary and non-documentary methods 
described in the rule. See proposed rule 1032.220(a)(2)(ii)(C).
---------------------------------------------------------------------------

    Similarly, the benefits of the proposed rule would also be lessened 
to the extent that an investment adviser's customer holds accounts for 
purposes other than accessing financial markets (for example, if the 
customer holds an account only to receive investment research 
services).\84\ In such cases, the benefits associated with protecting 
financial markets would not directly apply, although the other benefits 
discussed above would apply.\85\
---------------------------------------------------------------------------

    \84\ However, these services could also be used to facilitate 
other aspects of the money laundering process.
    \85\ See infra section IV.G.2 for a fuller discussion of these 
types of accounts.
---------------------------------------------------------------------------

    It is difficult to estimate how much economic loss the requirements 
would prevent. Neither the SEC nor FinCEN has data that would allow the 
quantification of how much money laundering would be reduced as a 
result of the proposed rule, or how much other illegal activity would 
be curbed by this reduction in money laundering.\86\ Money laundering 
and other illicit financing is related to human trafficking, drug 
trafficking, terrorism, public corruption, the proliferation of weapons 
of mass destruction, fraud, and other crimes and illicit activities 
that cause substantial monetary and nonmonetary damages.\87\ By 
reducing money laundering, and by extension its associated crimes, the 
proposed rule would reduce those harms to the extent that investment 
advisers are being used to facilitate such unlawful activity.
---------------------------------------------------------------------------

    \86\ See infra section IV.F for a request for comment about the 
availability of such data.
    \87\ For further discussion of the harms and risks associated 
with money laundering, see Treasury, National Strategy for Combating 
Terrorist and Other Illicit Financing (2018), available at https://home.treasury.gov/system/files/136/nationalstrategyforcombatingterroristandotherillicitfinancing.pdf; 
see also Treasury, National Money Laundering Risk Assessment (2024), 
available at, https://home.treasury.gov/system/files/136/2024-National-Money-Laundering-Risk-Assessment.pdf.
---------------------------------------------------------------------------

2. Costs
    While certain provisions of the proposed rule specify minimum 
requirements, such as the pieces of information required to be obtained 
and verified, many aspects of the proposed rule require an investment 
adviser to establish and implement its CIP according to its specific 
circumstances. For example, under the proposed rule, the CIP must be 
based on factors specific to each investment adviser, such as size, 
customer base, and location. Thus, the analysis and detail necessary 
for a CIP would depend on the complexity of the investment adviser and 
its operations. Highly complex firms have more risk factors to 
consider, given, for example, their number of offices, variety of 
services and products offered, and range of customers. However, many of 
these firms already have some AML/CFT

[[Page 44584]]

procedures in place and investment advisers already collect some 
identifying information that they would be required to collect under 
the proposed rule.\88\
---------------------------------------------------------------------------

    \88\ See supra section IV.C.
---------------------------------------------------------------------------

    Generally, these requirements are similar to those for other 
financial institutions with which investment advisers engage. Many 
advisers may already bear the cost of these similar CIP requirements 
for other financial institutions in certain lines of business in ways 
that would reduce the costs of complying with the proposed rules, and 
in such cases the proposed rules would create minimal additional costs. 
Some RIAs and ERAs may have reduced costs because they may already 
perform certain AML/CFT functions, including those associated with a 
CIP, because they are dual registrants or affiliated with a bank or 
broker-dealer.
    Under the proposed rule, RIAs that are dual registrants or 
affiliated advisers would not be legally required to establish a 
separate CIP for their advisory activities, provided that an existing 
comprehensive CIP-compliant AML/CFT program covers all the entity's 
legal and regulatory obligations under the proposed rule. 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 CIP requirements 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.\89\
---------------------------------------------------------------------------

    \89\ See supra id.
---------------------------------------------------------------------------

    Some investment advisers may have similarly reduced costs even if 
they do not currently directly perform CIP-related AML functions. In 
particular, investment advisers that use broker-dealers on behalf of 
their customers but that do not perform the procedures required by the 
broker-dealer's CIP may currently already bear some or all of the 
proposed rule's costs indirectly. Specifically, these investment 
advisers could bear such costs in the form of higher charges for the 
broker-dealer's services, since these broker-dealers are already 
required to comply with similar CIP requirements related to their joint 
customers. In such cases, investment advisers would face new costs 
associated with the proposed rule, but these may be offset at least in 
part by reduced costs for broker-dealer services.
    The proposed rule would only require investment advisers to collect 
and verify the identity of customers that directly open and hold 
accounts (as defined in the proposed rule) with the adviser. This scope 
of the rule would mitigate the proposed rule's costs just as it would 
mitigate the proposed rule's benefits as described above.\90\
---------------------------------------------------------------------------

    \90\ See supra section IV.D.1.
---------------------------------------------------------------------------

    In addition, investment advisers may deem the requirements of the 
proposed rule for any mutual fund to be satisfied if the customer 
(i.e., the mutual fund it advises) has developed and implemented a CIP 
that is compliant with the investment company's CIP requirements. This 
provision further lowers the aggregate cost of the proposed rule by 
negating or minimizing the cost associated with customers that are 
mutual funds.
(a) Establishing a CIP
    RIAs and ERAs would have to establish or in some instances modify a 
CIP to comply with the requirements of the proposed rule unless they 
currently have in place a CIP consistent with the proposed rule's 
requirements. Creating or modifying the policies and procedures 
detailed in the CIP would entail costs for these advisers. However, 
investment advisers may already have procedures in place for obtaining 
identifying information of customers and some investment advisers may 
have already implemented voluntary AML/CFT programs that are CIP-
compliant or that could serve as a framework for a CIP that is 
consistent with the minimum requirements of the proposed rule.\91\ Some 
investment advisers may have already implemented voluntary AML/CFT 
programs that are CIP-compliant. In particular, certain investment 
advisers that use broker-dealers or other financial institutions on 
behalf of their customers may have these programs in place, as these 
programs assist those financial institutions to comply with their CIP 
obligations.\92\ Accordingly, such investment advisers may already have 
written policies and procedures for conducting these or similar 
activities. The existing infrastructure related to extant practices 
would reduce the cost of complying with the proposed rule.
---------------------------------------------------------------------------

    \91\ See supra sections IV.C.1 and 2.
    \92\ See note 68.
---------------------------------------------------------------------------

    Establishing a written CIP would result in additional costs for 
some investment advisers to the extent they do not have policies and 
procedures that meet the minimum requirements in the rule. This 
includes investment advisers that would need to augment their policies 
and procedures to make them compliant, and costs associated with 
programming and testing automated systems. FinCEN and the SEC estimate 
that the average internal time cost for an investment adviser to 
establish, document and maintain a written CIP as described above would 
be $1,169.30, with most investment advisers incurring additional 
ongoing external costs of $584.\93\ These estimates imply $23,923,878 
in aggregate industry internal costs and $8,961,480 in aggregate 
industry annual external costs.\94\
---------------------------------------------------------------------------

    \93\ See the PRA analysis in Table 1, infra section V.B. 
Internal costs in this section are annual ongoing costs and include 
initial costs annualized over a three-year period. External ongoing 
costs are annual.
    \94\ Id.
---------------------------------------------------------------------------

(b) Obtaining and Verifying Identifying Information
    The proposed rule would require an investment adviser's CIP to 
contain procedures that specify the identifying information that will 
be obtained with respect to each customer. This information must 
include, at a minimum, the name, date of birth (or date of formation), 
address, and identification number of customers opening new accounts. 
Investment advisers already obtain from customers identifying 
information, such as their names and addresses, since most investment 
advisers need to distinguish their customers operationally and these 
particular forms of personally identifiable information are common ways 
of doing so.
    Despite this, we estimate that there would be some new costs for 
investment advisers because some may not be obtaining all the 
information required by the proposed rule or doing so consistently. 
These investment advisers would face additional costs in collecting 
this information and updating their account opening applications or 
account opening websites to insert line items requesting that customers 
provide the required information.
    The proposed rule would further require an investment adviser's CIP 
to include procedures to verify the identity of each customer and would 
provide investment advisers with multiple possible methods to do so. 
For example, depending on the procedures implemented based on the 
investment adviser's assessment of the relevant risks, customers that 
open accounts with an investment adviser can simply provide an 
unexpired government-issued identification evidencing nationality or 
residence and bearing a photograph or similar safeguard, such as a 
driver's license or passport, or if the

[[Page 44585]]

customer is not an individual, provide a copy of any documents showing 
its existence as a legal entity (e.g., certified articles of 
incorporation, government-issued business licenses, partnership 
agreements, or trust instruments and any amendments to such documents). 
Alternatively, investment advisers may, for example, obtain a financial 
statement from the customer or compare the information provided by the 
customer with information obtained from a consumer reporting agency or 
public database.
    The documentary and non-documentary verification methods set forth 
in the rule to verify the identities of customers are not meant to be 
an exclusive list of the appropriate means of verification. Other 
reasonable methods may be available now or in the future. The purpose 
of making the rule flexible in this regard would be to allow investment 
advisers to select verification methods that are, as section 326 would 
require, reasonable and practicable. Methods that are appropriate for 
an investment adviser with a localized customer base may not be 
sufficient for a different firm with customers from many different 
countries. The proposed rule recognizes this fact and, therefore, would 
allow investment advisers to employ such verification methods as would 
be suitable to form a reasonable belief that it knows the true 
identities of its customers.
    The SEC and FinCEN recognize that obtaining and verifying the 
identity of each customer would result in incremental costs for many 
investment advisers if these firms currently do not use verification 
methods or do not verify identities in a way that is consistent with 
the proposed rule's requirements. According to the PRA analysis in 
section V, the average cost of an ERA with two customers (the median 
number of ERA customers) to obtain and verify the identifying 
information as described above would be $212.60 in internal cost 
burdens with most ERAs facing an additional $46.72 in annual ongoing 
external costs.\95\ Similarly, the average internal cost burden for an 
RIA with 100 customers (the median number of RIA customers) would be 
$10,630, with most RIAs facing ongoing external annual costs of 
$2,336.\96\ These estimates are based on averages and do not reflect 
the fact that costs will vary between investment advisers for myriad 
reasons. In particular, ERA customers are limited to venture capital 
funds and other private funds. These customers would likely have a 
smaller per-customer cost than natural person customers.
---------------------------------------------------------------------------

    \95\ Id. The PRA analysis in Table 1 estimates an average 
internal cost of $106.30 per customer, so an ERA with two customers 
would face an internal cost of 2 x 106.30 = $212.60. It additionally 
estimates that 75% of investment advisers would require an average 
annual external burden of $23.36 per customer, so an ERA with two 
customers would face an external cost of 2 x $23.36 = $46.72.
    \96\ Id. An RIA with 100 customers would face an internal cost 
of 100 x 106.30 = $10,630 and would likely face an annual external 
burden of 100 x $23.36 = $2,336. For this and other costs, mutual 
fund customers are included in our counts of customers and so they 
are included in these cost calculations despite the fact that 
investment advisers may consider their obligations under the 
proposed rule to be satisfied under certain circumstances for mutual 
fund customers. This factor will overestimate costs.
---------------------------------------------------------------------------

    The proposed rule would also require an investment adviser's CIP to 
include procedures for responding to circumstances in which the 
investment adviser cannot form a reasonable belief that it knows the 
true identity of a customer. While the direct costs of this requirement 
are included in the estimate above, this requirement may create an 
additional unquantifiable indirect cost. Specifically, to the extent 
that any customers who are not intended to be targeted by the proposed 
rule may be unable to have their identities verified, and thus be 
subjected to the consequences of this failure to identify (for example, 
being unable to receive services from the investment adviser), there 
would be costs associated with temporarily (or possibly in unusual 
unforeseen circumstances, permanently) losing or having diminished 
access to financial markets.
(c) Determining Whether Customers Appear on a Federal Government List
    The proposed rule would require an investment adviser's CIP to 
include reasonable procedures for determining whether a customer 
appears on any list of known or suspected terrorists or terrorist 
organizations issued by any Federal government agency and designated as 
such by Treasury in consultation with the Federal functional 
regulators. Treasury and the Federal functional regulators have not yet 
designated any such lists. However, for purposes of this economic 
analysis, we nonetheless estimate the costs of complying with this 
provision if such lists were to be designated. Our understanding is 
that some investment advisers and other financial institutions already 
check their customers against the SDN List. Since the SDN List is often 
checked in practice and since the creation of such lists that could be 
provided to investment advisers is a reasonable consideration given 
this provision in the proposed rule, we are estimating the costs of 
complying from the current screening practices using the SDN List. We 
assume, based on staff experience with firms that already check against 
government lists, that for most accounts this process would be 
automated and conducted on a batch-file basis, though with significant 
manual intervention to address false positives. We estimate that the 
average cost to an ERA with two customers to check such lists would 
consist of $170.08 in internal time costs with no additional ongoing 
external costs.\97\ Similarly, for the average cost of an RIA with 100 
customers would be $8,504 in internal costs with no additional ongoing 
annual external costs.\98\ These estimates are based on averages and do 
not reflect the fact that costs will vary between investment advisers 
for myriad reasons. In particular, ERA customers are limited to venture 
capital funds and other private funds. These customers are exceedingly 
unlikely to be placed on government lists, and so the costs of 
compliance with this provision will be lower for ERAs or other types of 
advisers that solely have funds as customers.
---------------------------------------------------------------------------

    \97\ Id. The PRA analysis in Table 1 estimates an average 
internal cost of $85.04 per customer, so an ERA with two customers 
would face an internal cost of 2 x 53.15 = $170.08.
    \98\ Id. An RIA with 100 customers would face an internal cost 
of 100 x 85.04 = $8,504.
---------------------------------------------------------------------------

(d) Providing Notice to Customers
    The proposed rule would require an investment adviser's CIP to 
include procedures for providing their customers adequate notice that 
the investment adviser is requesting information to verify their 
identities. Notice would be considered adequate under the proposed rule 
if the investment adviser generally describes the identification 
requirements in the proposed rule and provides such notice in a manner 
reasonably designed to ensure that a customer is able to view the 
notice, or is otherwise given notice, before opening an account. For 
example, if an account is opened electronically, such as through an 
internet website, the investment adviser may provide notice 
electronically. We estimate the average internal cost burden of an ERA 
with two customers to provide notice to customers to be $17, with most 
ERAs facing annual ongoing external costs of $23.36.\99\ Similarly, the 
average internal

[[Page 44586]]

cost burden of an RIA with 100 customers would be $850, with most RIAs 
facing additional ongoing annual external costs of $1,168.\100\ These 
estimates are based on averages and do not reflect the fact that costs 
will vary between investment advisers for myriad reasons.
---------------------------------------------------------------------------

    \99\ Id. The PRA analysis in Table 1 estimates an average 
internal cost of $8.50 per customer, so an ERA with two customers 
would face an internal cost of 2 x 8.50 = $17. It additionally 
estimates that 75% of investment advisers would require an average 
annual external burden of $11.68 per customer, so an ERA with two 
customers would face an external cost of 2 x $11.68 = $23.36.
    \100\ Id. An RIA with 100 customers would face an internal cost 
of 100 x 8.50 = $850 and would likely face an annual external burden 
of 100 x $11.68 = $1,168.
---------------------------------------------------------------------------

(e) Recordkeeping
    The proposed rule would require an investment adviser's CIP to 
include procedures to make and retain records of customers' identifying 
information for five years after the date of closing of the account and 
records regarding the verification of a customer's identity for five 
years after the record is made. We estimate that many of the records 
required by the rule are already made and maintained by investment 
advisers. As discussed above, investment advisers already obtain some 
of the minimum identifying information specified in the proposed rule, 
and this information is retained for use in firms' operations.\101\ We 
estimate that the recordkeeping requirement could result in additional 
costs for some investment advisers that currently do not maintain 
certain of the records for the prescribed time period. We estimate that 
the average cost to an ERA with two customers to make and maintain the 
required records would be an internal cost burden of $106.30 with no 
additional ongoing external costs.\102\ Similarly, the average internal 
cost burden to an RIA with 100 customers would be $5,315, with no 
additional annual external costs.\103\ These estimates are based on 
averages and do not reflect the fact that costs will vary between 
investment advisers for myriad reasons.
---------------------------------------------------------------------------

    \101\ See supra section IV.C.
    \102\ The PRA analysis in Table 1, infra section V.B, estimates 
an average internal cost of $53.15 per customer, so an ERA with two 
customers would face an internal cost of 2 x 53.15 = $170.
    \103\ Id. An RIA with 100 customers would face an internal cost 
of 100 x 53.15 = $5,315.
---------------------------------------------------------------------------

(f) Reliance on Another Financial Institution
    The proposed rule allows an investment adviser to, under certain 
circumstances, rely on another financial institution to perform any of 
the procedures associated with the adviser's CIP. This provision would 
generally lessen the direct compliance cost of the rule since it would 
allow these procedures to be done by the party most efficiently 
positioned to do so and would decrease the likelihood that multiple 
parties will perform duplicative tasks to comply with regulations 
affecting different entities. While there may be costs associated with 
entering or modifying a contract with another financial institution to 
ensure that the contract's terms have language required by this 
provision, and there may be monitoring costs to ensure compliance, 
investment advisers can generally choose to not rely on another 
financial institution instead if those costs are greater than the cost 
mitigation that comes from relying on said financial institution.
(g) Summary and Overall Costs
    We recognize that the actual costs associated with establishing a 
CIP will vary from the estimates above depending on the size of the 
investment adviser, its lines of businesses, the relevant risks to be 
addressed by the investment adviser's CIP, and the extent to which the 
investment adviser's current practices would need to be modified to 
comply with the requirements. We estimate that the average total cost 
to an ERA with two customers to comply with the proposed rules would be 
an internal cost burden of $1,675, with most ERAs facing total annual 
ongoing external costs of $654.\104\ Similarly, the average total 
internal cost for an RIA with 100 customers would be $26,468, with most 
RIAs facing total ongoing annual external cost burdens of $4,088.\105\ 
We further estimate total aggregate industry costs of: $404,045,339 in 
internal time costs and $ 48,446,970 in annual external time 
costs.\106\
---------------------------------------------------------------------------

    \104\ This cost is the sum of the analogous costs listed in 
sections IV.D.2.a through e.
    \105\ See the PRA analysis in Table 1, infra section V.B.
    \106\ Id.
---------------------------------------------------------------------------

    We also recognize that these costs would not necessarily be borne 
solely by investment advisers. Some of these costs could be passed on 
to the funds and other customers managed by investment advisers. The 
extent to which these costs would be passed on to customers depends on 
the interplay of relevant market forces and thus is impossible to 
predict with accuracy.
    The proposed rule provides that the SEC, with the concurrence of 
the Secretary, may by order or regulation exempt any investment adviser 
or any type of account from the requirements of this section, or that 
the Secretary, with the concurrence of the SEC, may exempt any 
investment adviser or type of account. In issuing such exemptions, the 
SEC and the Secretary will consider whether the exemption is consistent 
with the purposes of the BSA, and in the public interest, and may 
consider other necessary and appropriate factors. This could provide 
another way to mitigate costs in unforeseen circumstances. For example, 
if the SEC and the Secretary determine that it is not in the public 
interest for certain types of accounts to be subject to the 
requirements of the proposed rule, they may exempt these accounts.
    Investment advisers would be required to develop and implement a 
CIP that complies with the requirements of the proposed rule on or 
before six months from the effective date of the regulation. Because 
the overall development burdens are relatively low,\107\ we do not 
believe that this timeline would impose additional costs beyond the 
direct costs of compliance as quantified in the PRA.
---------------------------------------------------------------------------

    \107\ The PRA analysis in Table 1, infra section V.B, estimates 
the total average cost of developing a CIP to be $1,753.
---------------------------------------------------------------------------

E. Effects on Efficiency, Competition, and Capital Formation

    We expect that the requirements would have minimal impact on 
efficiency, competition, and capital formation. Relative to the size of 
investment markets, the magnitude of assets that are intended to be 
targeted are relatively small. Nasdaq estimates that $3.1 trillion in 
illicit funds entered the global financial system in 2023.\108\ State 
Street Global Advisors, by contrast, has estimated the global market 
portfolio (the value of all investable capital assets) to be $179 
trillion as of December 31, 2021.\109\ These estimates suggest that the 
proposed rule could, at a maximum, impact 1.7 percent of global market 
funds using an average investment holding period for illicit funds of 
one year and making the extreme assumption that all illicit funds that 
enter the global financial system do so through investment 
advisers.\110\ The

[[Page 44587]]

actual impact is likely to be much lower because investment advisers do 
not facilitate all funds in the global financial system, and the 
average time of investment for funds used in money laundering is likely 
to be shorter than one year.\111\ Further, the costs associated with 
compliance are small enough relative to assets managed by investment 
advisers so as not to have a significant impact on competition in the 
investment adviser market.\112\
---------------------------------------------------------------------------

    \108\ See 2024 Global Financial Crime Report, Nasdaq (2024), 
available at https://nd.nasdaq.com/rs/303-QKM-463/images/2024-Global-Financial-Crime-Report-Nasdaq-Verafin-20240115.pdf.
    \109\ See Frederic Dodard and Amy Le, Global Market Portfolio: 
Value of Investible Assets Touches All-Time High, State Street 
Global Advisors (Feb. 2022), available at https://www.ssga.com/library-content/pdfs/global/global-market-portfolio-value-of-investable-assets-touch-all-time-high.pdf.
    \110\ Since the estimate of $3.1 trillion entering the market is 
a flow measure while the $179 trillion estimate of total asset value 
is a stock measure, to compare the two, some assumption is needed 
about the average duration for which investments remain in the 
financial system. For example, if we were to assume an average 
holding period of two years, then the estimate of the percentage of 
global market funds impacted would double. Conversely, if we were to 
assume an average holding period of six months, then that estimate 
would halve.
    \111\ While some money laundering, such as using private funds, 
may be geared towards long time horizons, other illicit financial 
activity likely has a shorter duration than one year. However, it is 
possible that the rule could, over time, impact a larger percentage 
of global financial market assets if these funds remain in the 
market for more than one year, on average.
    \112\ For example, we estimate (supra section IV.D.2.g) that the 
median ERA would face a total burden of $2,327 (equal to the 
internal burden of $1,675 plus the external burden of $654) and the 
median RIA would face a total burden of $30,572 (equal to the 
internal burden of $26,468 plus the external burden of $4,088). 
Meanwhile, the average RIA has assets under management of roughly $8 
billion and the average ERA has assets under management of roughly 
$900 million.
---------------------------------------------------------------------------

    To the extent that the rule would be effective at preventing 
illicit assets from entering financial markets--for example, if it 
deters money launderers from attempting to do so or assists investment 
advisers and law enforcement in discovering these activities--there may 
be impacts on market efficiency. Specifically, those that engage in 
money laundering or finance terrorism are likely to have incentives for 
investment unrelated to the expected return or risk of the asset that 
differ from the broader market. As a result, their investments change 
the equilibrium of expected asset risks and returns from what would 
exist in a market without these illicit funds. For example, money 
launderers could have very different time horizons for investment and 
thus could have different liquidity preferences, and so their 
investments could drive up the premium for liquidity. They likely also 
have a greater desire to keep their identity hidden and so may choose 
assets based on this feature. To the extent that money launderers 
invest based on preferences different from those of the broader market, 
asset values could, as a result, be distorted relative to what would be 
efficient for the broader market. Accordingly, it is possible that 
removing those funds from financial markets would increase market 
efficiency. The extent to which market efficiency would increase 
depends on how different money launderers' investment preferences are 
from those of other investors and how much capital would be effectively 
prohibited from entering financial markets. We would generally expect 
these effects to be small, however, given that the magnitude of assets 
that are intended to be targeted are relatively small compared to the 
size of investment markets, as discussed above.
    Competition may decrease because of the additional compliance costs 
associated with the proposed rule. However, the relatively small 
magnitude of estimated costs of the proposed rule, as compared to total 
assets under management of advisers, suggests that this effect is 
unlikely to be significant.
    The proposed rule is unlikely to have a significant effect on 
capital formation. To the extent that investors choose to invest more 
in financial markets because they believe that the proposed rule would 
reduce the risk of investing by removing illicit funds from the market, 
capital formation could increase.

F. Request for Comment

    FinCEN and the SEC seek comment on all aspects of the economic 
analysis of the proposed rule, including whether the analysis 
accurately characterizes the costs and benefits of the minimum 
requirements set forth by the proposed rule, and whether the specific 
form of the requirements creates costs or benefits that are not 
attributable to the statute. To the extent possible, we request that 
commenters provide supporting data and analysis. In particular, we ask 
commenters to consider the following questions:
    (1) In section IV.B, we state that we do not know what percentage 
of money laundering crimes sentenced involve investment advisers. Are 
there sources of data that estimate this percentage? In what ways would 
this figure be useful for assessing the benefits associated with the 
proposed rule that is not achieved by the available Treasury analysis 
of SAR reports?
    (2) In section IV.C.1, we state that some investment advisers may 
already check their customers' accounts against the SDN List. To what 
extent do investment advisers currently check the SDN List and what 
factors lead an investment adviser to do so?
    (3) In sections IV.C.2 and IV.D.2., we state that investment 
advisers already collect identifying information required under the 
proposed rule, either because of contractual obligations or out of 
operational considerations. Under what circumstances do investment 
advisers not already collect or retain records of some or all of this 
information?
    (4) In section IV.D.1, we state that we do not have data that would 
allow us to assess how much money laundering would be reduced as a 
result of the proposed rule, or how much other illegal activity would 
be curbed by this reduction in money laundering. What, if any, data 
exists regarding this activity
    (5) In section IV.D.2, we state that some investment advisers may 
already bear some of the costs of this rule as a result of similar 
extant requirements on other financial institutions. Is this assumption 
correct, and if so, how prevalent is this practice?
    (6) In Section IV.D.2, we state that allowing an investment adviser 
to, under certain circumstances, rely on another financial institution 
to perform any of the procedures associated with the adviser's CIP 
would generally lessen the direct compliance cost of the rule. To what 
extent is any anticipated reduction of costs likely to occur, 
considering the costs of relying on such institutions?
    (7) To what extent do investment advisers currently rely on third-
party service providers to perform functions related to AML/CFT 
responsibilities, particularly those associated with a CIP? Would the 
proposed rule increase or decrease investment advisers' reliance on 
third-party service providers to perform these functions? If the 
proposed rule increased investment advisers' reliance on third-party 
service providers to perform these functions, what additional costs 
would result?
    (8) In places where the costs of the proposed rule are estimated, 
are these estimates reasonable? Are there any data that could inform 
the cost estimates of complying with any provisions of the proposed 
rule? To what extent are there important determinants of costs that 
could vary between investment advisers that we have not considered in 
this analysis?
    (9) In section IV.G, we discuss the possibility of requiring the 
Legal Entity Identifier (``LEI'') as the identifier for non-natural 
person customers. Should the final rule require advisers to use the LEI 
as the identifier for such customers?
    (10) If the adviser knows or has reason to know a customer's assets 
are maintained at a financial institution that performs CIP 
requirements because the financial institution is subject to BSA 
obligations, what would be the benefits and costs of an adviser being 
required to comply with the proposed rule?

[[Page 44588]]

G. Reasonable Alternatives

1. Requiring the Use of Legal Entity Identifier (``LEI'') as the 
Identifier for Legal Entities Other Than Natural Persons
    The proposed rule allows various forms of identification for non-
natural person customers. We considered whether investment advisers 
should be required to use the LEI or some other uniform standard as the 
identifier for such customers.
    The LEI is an identification number based on the International 
Organization for Standardization (``ISO'') 17442-1 standard that 
uniquely identifies a legal entity.\113\ It can facilitate the 
automatic processing of financial transactions and is used in financial 
regulatory reporting. For example, the SEC requires an adviser to 
provide an LEI, if it has one, on Item 1.P on Form ADV.\114\
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    \113\ See ISO 17442: The Global Standard, available at https://www.gleif.org/en/about-lei/iso-17442-the-lei-code-structure.
    \114\ See Rules Implementing Amendments to the Investment 
Advisers Act of 1940, 76 FR 42950 (July 19, 2011).
---------------------------------------------------------------------------

    Using the LEI would assist investment advisers and enforcement 
agencies in detecting money laundering more effectively than using a 
broad array of identifiers because of its uniformity and relative ease 
of analysis (e.g., minimizing any need to map disparate jurisdictional 
identifiers), though this may be mitigated by the proposed rule's scope 
which is limited to the direct customers of an adviser and not its 
beneficial owners. However, this is balanced against the flexibility 
provided to investment advisers to comply with the rule's requirements. 
Further, since natural persons could not use this identifier, rule 
compliance would already necessitate collecting different types of 
identifiers for these individuals. Moreover, omitting an LEI 
requirement from the proposed rule would be consistent with the 
existing rules for broker-dealers and mutual funds, and notwithstanding 
the absence of an LEI requirement, customers could still provide their 
LEIs to help advisers satisfy their obligations under the proposed 
rule. Finally, because legal names and associated LEIs are publicly 
available, bad actors could use such information to impersonate 
legitimate entities in their submissions to an investment adviser's CIP 
and reduce the reliability of the LEI as an identification tool.
2. Exceptions for Customers That Do Not Use Investment Advisers To 
Access Financial Markets
    The proposed rule would require an investment adviser's CIP to 
apply to all types of accounts,\115\ though the adviser may consider 
the type of account in determining what procedures are appropriate. We 
considered whether accounts of customers that do not use the investment 
adviser to access financial markets, such as those that only receive 
investment research services, should be excluded from the definition of 
account.
---------------------------------------------------------------------------

    \115\ Under certain circumstances, the requirements can be 
deemed satisfied for mutual fund customers.
---------------------------------------------------------------------------

    The benefits of the rule related to such accounts are lower than 
for other accounts because the benefits relating to protecting 
financial markets do not directly apply. However, other benefits 
discussed above, including those relating to identifying criminal 
activity and preventing illicit proceeds from being legitimized still 
apply. Further, criminal networks could still use investment adviser 
products to inform their investment decisions or use investment 
advisers as ways of appearing legitimate to broker-dealers or other 
financial institutions. For example, criminals could potentially gain 
information on how to place or layer illicit funds, even if the 
investment adviser is not actually doing the placing or layering. An 
investment adviser's CIP must assess the relevant risks and enact 
procedures that take account of these risks.
    Excluding or otherwise excepting these accounts would eliminate the 
benefits of the rule for these accounts, but could also reduce the 
costs of compliance with the rule, if the costs of differentiating 
these accounts are not higher than the costs of complying with the rule 
for these accounts. However, we do not believe that these cost savings 
would be large because: (1) the cost per account of the rule is 
relatively low; (2) to the extent that these accounts create less risk 
than do other types of accounts, the compliance cost of these accounts 
under the proposed rule could be even lower than for other accounts if 
investment advisers enact procedures with lower costs than those they 
would establish for riskier types of accounts; and (3) differentiating 
these accounts may be relatively costly, as investment advisers would 
need to create new systems to identify which customers only have 
accounts that would fit the exclusion.

V. Paperwork Reduction Act

A. Introduction

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\116\ The proposed rule would include 
new information collection burdens. The title of new collection of 
information we are proposing is ``Amendment to 31 CFR part 1032 under 
the USA PATRIOT Act.'' OMB has not yet assigned a control number for 
this title. We are submitting the proposed collections of information 
to the Office of Management and Budget (``OMB'') for review in 
accordance with the PRA.\117\ An agency may not conduct or sponsor, and 
a person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number. We discuss 
below the collection of information burdens associated with the 
proposal.
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    \116\ 44 U.S.C. 3501.
    \117\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \118\ FinCEN, Anti-Money Laundering/Countering the Financing of 
Terrorism Program and Suspicious Activity Report Filing Requirements 
for Registered Investment Advisers and Exempt Reporting Advisers, 89 
FR 12108 (proposed Feb. 15, 2024).
    \119\ 31 U.S.C. 5318(l).
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B. Proposed Rule

    If FinCEN's proposed AML/CFT Program and SAR Proposed Rule \118\ is 
adopted, section 326 of the USA PATRIOT ACT would require Treasury and 
the Commission to prescribe regulations setting forth minimum standards 
for investment advisers regarding the identities of customers when they 
open an account. Section 326 also provides that the regulations issued 
by Treasury and the Commission must, at a minimum, require investment 
advisers to implement reasonable procedures for: (1) verification of 
the identity of any person seeking to open an account, to the extent 
reasonable and practicable; (2) maintenance of the information used to 
verify the person's identity, including name, address, and other 
identifying information; and (3) determination of whether the person 
appears on any lists of known or suspected terrorists or terrorist 
organizations issued by any government agency.\119\ These requirements 
are referred to as Customer Identification Program (``CIP'') 
regulations and are long-standing, foundational components of the 
United States' AML/CFT regime. Under this proposed rule, the CIP must 
be based on the investment adviser's assessment of the relevant risks, 
including, at a minimum, those presented by the various types of

[[Page 44589]]

accounts maintained by the investment adviser, the various methods of 
opening accounts provided by the investment adviser, the various types 
of identifying information available and the investment adviser's size, 
location, and customer base.\120\
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    \120\ Proposed 31 CFR 1032.220(a)(2).
---------------------------------------------------------------------------

    Under this proposed rule, an investment adviser would be required 
to retain (1) the identifying information obtained from a customer 
while the customer's account remains open and for five years after the 
date the account is closed and (2) the records pertaining to the 
verification of a customer's identity for five years after the record 
is made.\121\ Each requirement to disclose information, offer to 
provide information, or adopt policies and procedures constitutes a 
``collection of information'' requirement under the PRA.\122\ The 
respondents to these collection of information requirements would be 
RIAs and ERAs. As of October 5, 2023, there were approximately 14,914 
RIAs and approximately 5,546 ERAs.\123\ This collection of information 
is found at 31 CFR 1032.220 and is mandatory. All RIAs and ERAs would 
be subject to the requirements of the proposed rule. Responses provided 
to the Commission in the context of its examination and oversight 
program concerning the proposed rule would be kept confidential subject 
to the provisions of applicable law.
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    \121\ Proposed 31 CFR 1032.220(a)(3)(ii).
    \122\ See 44 U.S.C. 3502(3).
    \123\ The number of RIAs is an estimate of all RIAs with at 
least one client based on responses to Item 5.D of Form ADV, as of 
Oct. 5, 2023. The number of ERAs is an estimate of all ERAs with at 
least one client based on responses to Item 2.B of Form ADV, as of 
Oct. 5, 2023.
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    Investment adviser implementation of CIPs and reasonable procedures 
related thereto under this proposed rule would make it easier to 
prevent, detect, and prosecute money laundering and the financing of 
terrorism by (i) specifying the information investment advisers must 
obtain from or about customers that can be used to verify the identity 
of the customers, (ii) requiring investment advisers to maintain and 
retain records of the information used to verify the customer's 
identity, and (iii) requiring investment advisers to determine whether 
the customer appears on any lists of known or suspected terrorists or 
terrorist organizations provided by any Federal government agency and 
designated as such by Treasury in consultation with the Federal 
functional regulators. This would make it more difficult for persons to 
use false identities to establish customer relationships with 
investment advisers for the purposes of laundering money or moving 
funds to effectuate illegal activities, such as financing terrorism.
    We have made certain estimates of the burdens associated with the 
proposed rule solely for the purpose of this PRA analysis. The table 
below summarizes the initial and ongoing annual burden and cost 
estimates associated with the proposed rule.
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BILLING CODE 4810-02-C

C. Request for Comment

    We request comment on whether these estimates are reasonable. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), FinCEN and the Commission solicit 
comments in order to: (1) evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information will have practical 
utility; (2) evaluate the accuracy of FinCEN and the Commission's 
estimate of the burden of the proposed collection of information, 
including whether the estimates are too high or too low; whether the 
median number of clients is an appropriate figure to use; whether 
certain costs, such as verification costs, should be

[[Page 44592]]

lower for certain customers (such as private funds if the adviser forms 
the private fund) and higher for other types of customers (such as in 
separately managed account relationships); (3) determine whether there 
are ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) determine whether there are ways 
to minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons wishing to submit comments on the collection of information 
requirements of the proposed rule should direct them to the OMB Desk 
Officer for the Securities and Exchange Commission, 
[email protected], and should send a copy to 
Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549-1090, with reference to File No. 
S7-2024-02. OMB is required to make a decision concerning the 
collections of information between 30 and 60 days after publication of 
this release; therefore, a comment to OMB is best assured of having its 
full effect if OMB receives it within 30 days after publication of this 
release. Requests for materials submitted to OMB by the Commission with 
regard to these collections of information should be in writing, refer 
to File No. S7-2024-02, and be submitted to the Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 
20549-2736.

VI. Regulatory Flexibility Act

    The SEC and FinCEN have prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA'') in accordance with section 3(a) of the 
Regulatory Flexibility Act (``RFA'').\124\ It relates to the proposed 
rule that would amend 31 CFR part 1032 and be issued pursuant to 
section 326 of the USA PATRIOT Act as amended and codified at 31 U.S.C. 
5318(l).\125\
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    \124\ 5 U.S.C. 603(a).
    \125\ 31 U.S.C. 5318 is part of the BSA.
---------------------------------------------------------------------------

A. Reason for and Objectives of the Proposed Rule

    The reasons for, and objectives of, the proposed rule are discussed 
in more detail in sections I and II, above. The burdens of these 
requirements on small advisers are discussed below as well as above in 
sections IV and V, which discuss the burdens on all advisers subject to 
the proposed rule. Sections II through V also discuss the professional 
skills that compliance with the proposed rule would require.
    If FinCEN's proposed AML/CFT Program and SAR Proposed Rule \126\ is 
adopted, section 326 of the USA PATRIOT Act requires Treasury and the 
Commission to prescribe regulations setting forth minimum standards for 
investment advisers regarding the identities of customers when they 
open an account. The statute also would provide that the regulations 
issued by Treasury and the Commission must, at a minimum, require 
investment advisers to implement reasonable procedures for: (1) 
verification of the identity of any person seeking to open an account, 
to the extent reasonable and practicable; (2) maintenance of the 
information used to verify the person's identity, including name, 
address, and other identifying information; and (3) determination of 
whether the person appears on any lists of known or suspected 
terrorists or terrorist organizations issued by any government 
agency.\127\ The objective of the proposed rule is to make it easier to 
prevent, detect and prosecute money laundering and the financing of 
terrorism. The proposed rule seeks to achieve this goal by requiring 
investment advisers to establish a CIP with procedures that include 
obtaining identifying information from customers that can be used to 
verify the identity of the customers. This will make it more difficult 
for persons to use false identities to establish customer relationships 
with investment advisers for the purposes of laundering money or moving 
funds to effectuate illegal activities, such as financing terrorism. 
The proposed rule is designed to align the requirements for investment 
advisers with existing rules for other financial institutions, such as 
broker-dealers, mutual funds, credit unions, banks, and others, to 
adopt and implement CIPs.
---------------------------------------------------------------------------

    \126\ FinCEN, Anti-Money Laundering/Countering the Financing of 
Terrorism Program and Suspicious Activity Report Filing Requirements 
for Registered Investment Advisers and Exempt Reporting Advisers, 89 
FR 12108 (proposed Feb. 15, 2024).
    \127\ 31 U.S.C. 5318(l).
---------------------------------------------------------------------------

    We are also proposing to revise 31 CFR 1032.100 to provide numerous 
definitions for purposes of proposed 31 CFR 1032.220. This aspect of 
the proposed rule has no independent substantive requirements or 
economic impacts.

B. Legal Basis

    The proposed rule is being promulgated pursuant to the BSA, which 
mandates that FinCEN and the Commission issue a regulation setting 
forth minimum standards for financial institutions and their customers 
regarding the identity of the customer that shall apply in connection 
with opening of an account at the financial institution.\128\
---------------------------------------------------------------------------

    \128\ 31 U.S.C. 5318(l)(4).
---------------------------------------------------------------------------

C. Small Entities Subject to the Proposed Rule

    The proposed rule would affect investment advisers that are small 
entities. Under Commission rules, for the purposes of the RFA, an 
investment adviser generally is a small entity if it: (1) has, and 
reports on Form ADV, assets under management having a total value of 
less than $25 million; (2) did not have total assets of $5 million or 
more on the last day of the most recent fiscal year; and (3) does not 
control, is not controlled by, and is not under common control with 
another investment adviser that has assets under management of $25 
million or more, or any person (other than a natural person) that had 
total assets of $5 million or more on the last day of its most recent 
fiscal year (``small adviser'').\129\ The proposed rule would not 
affect most small advisers, because generally small advisers are 
registered with one or more state securities authorities and not with 
the Commission pursuant to section 203A of the Advisers Act. As a 
result of section 203A, most small advisers are prohibited from 
registering with the Commission because an investment adviser generally 
must have more than $25 million of assets under management or be an 
adviser to a registered investment company.\130\ Based on data from the 
Investment Adviser Registration Depository system (``IARD''), we 
estimate that as of October 5, 2023, approximately 276 RIAs and 113 
ERAs are small entities under the RFA.\131\ As discussed above in 
section

[[Page 44593]]

IV, FinCEN and the Commission estimate that based on IARD data as of 
October 5, 2023, approximately 14,914 RIAs and approximately 5,546 
ERAs, including all of the approximately 276 RIAs and 113 ERAs that are 
small entities under the RFA, would be subject to the proposed rule.
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    \129\ Advisers Act rule 0-7(a) (17 CFR 275.0-7).
    \130\ 15 U.S.C. 80b-3.
    \131\ Based on SEC-registered investment adviser responses to 
Items 5.F. and 12 of Form ADV. We do not have direct data that 
indicates how many exempt reporting advisers are small entities 
under the RFA because exempt reporting advisers are not required to 
report regulatory assets under management on Form ADV. We estimate 
that, due to SEC registration thresholds, the only small entity 
exempt reporting advisers that would be subject to the proposed rule 
would be those that maintain their principal office and place of 
business outside the United States. We do not have fulsome direct 
data indicating which exempt reporting advisers that maintain their 
principal office and place of business outside the United States are 
small entities, because although exempt reporting advisers are 
required to report in Part 1A, Schedule D the gross asset value of 
each private fund they manage, advisers with their principal office 
and place of business outside the United States may have additional 
assets under management other than what they report in Schedule D. 
Therefore, to estimate how many of the exempt reporting advisers 
that maintain their principal office and place of business outside 
the United States could be small entities, we use a calculation from 
a comparable data set: SEC-registered investment advisers. According 
to Form ADV data as of Oct. 5, 2023, there are 48 small entity SEC-
registered investment advisers with their principal office and place 
of business outside the United States and 797 total registered 
investment advisers with their principal office and place of 
business outside the United States (48 divided by 797 = 6%). There 
are approximately 1,868 exempt reporting advisers with their 
principal office and place of business outside the U.S. As a result, 
we estimate that the same percentage (6%) of those advisers are 
small entities, which equals approximately 113 exempt reporting 
advisers.
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D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The proposed rule would impose certain notification and compliance 
requirements on investment advisers, including those that are small 
entities. All RIAs and ERAs, including small entity advisers, would be 
required to comply with the proposed rule's CIP requirements, which are 
summarized in this IRFA. All of these requirements are also discussed 
in detail, above, in sections I and II, and these requirements and the 
burdens on respondents, including those that are small entities, are 
discussed above in sections IV and V and below. The professional skills 
required to meet these specific burdens are also discussed in sections 
II through V.
    There are different factors that would affect whether a smaller 
adviser incurs costs relating to these requirements that are higher or 
lower than the estimates discussed in section V. For example, we would 
expect that smaller advisers may not already have CIP programs, or they 
may not already have CIP programs that meet certain of the elements 
that would be required under the proposed rule. Also, while we would 
expect larger advisers to incur higher costs related to this proposed 
rule in absolute terms relative to a smaller adviser, we would expect a 
smaller adviser to find it more costly, per dollar managed, to comply 
with the requirements because it would not be able to benefit from a 
larger adviser's economies of scale.
    As discussed above, there are approximately 276 RIAs and 113 ERAs 
that are small entities, and we estimate that 100 percent of these are 
subject to the proposed rule. As discussed above in section V, the 
proposed rule, which would require advisers to, among other things, 
adopt and implement procedures to verify the identity of any customer, 
would create a new annual burden of approximately 249 hours per RIA and 
15.76 hours per ERA, or 70,504.88 hours in aggregate for small advisers 
(1,780.88 hours for ERAs and 68,724 hours for RIAs). We therefore would 
expect the annual monetized aggregate cost to small advisers associated 
with the proposed rule to be approximately $7,494,668.74 ($7,305,361.20 
for RIAs and $189,307.54 for ERAs).\132\
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    \132\ Internal time costs calculated as follows: 68,724 hours 
for RIAs x $106.30 plus 1,780.88 hours for ERAs x $106.30. The 
estimated annual external cost burden for small advisers would be: 
$1,502,567.76, assuming 75% of these advisers will use outside legal 
services for these collections of information.
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E. Duplicative, Overlapping, or Conflicting Federal Rules

    Investment advisers generally do not have obligations under the BSA 
specifically for customer identification programs.\133\ As a result, we 
have not identified any federal rules that would duplicate, overlap, or 
conflict with the proposed rule. If FinCEN's proposed AML/CFT Program 
and SAR Proposed Rule \134\ is adopted, section 326 of the USA PATRIOT 
Act requires Treasury and the Commission to prescribe regulations 
setting forth minimum standards for investment advisers regarding the 
identities of customers when they open an account. This congressional 
directive cannot be followed absent the issuance of a new rule.
---------------------------------------------------------------------------

    \133\ As mentioned above, investment advisers that are banks (or 
bank subsidiaries) subject to the jurisdiction of the FFIRAs are 
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).
    \134\ FinCEN, Money Laundering/Countering the Financing of 
Terrorism Program and Suspicious Activity Report Filing Requirements 
for Registered Investment Advisers and Exempt Reporting Advisers, 89 
FR 12108 (proposed Feb. 15, 2024).
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F. Significant Alternatives

    The RFA directs FinCEN and the Commission to consider significant 
alternatives that would accomplish our stated objective, while 
minimizing any significant economic effect on small entities. We 
considered the following alternatives for small entities in relation to 
the proposed rule: (1) exempting advisers that are small entities from 
all or part of the proposed rule; (2) establishing different 
requirements, to account for resources available to small entities; (3) 
clarifying, consolidating, or simplifying the compliance requirements 
under the proposed rule for small entities; and (4) using design rather 
than performance standards.
    Regarding the first and second alternatives, FinCEN and the SEC 
currently believe that establishing different requirements for small 
advisers, or exempting small advisers from the proposed rule, or any 
part thereof, would likely be inappropriate under these circumstances. 
Moreover, FinCEN and the Commission do not believe that those 
alternatives are appropriate given the flexibility built into the rule 
to account for, among other things, the differing sizes and resources 
of advisers, as well as the importance of the statutory goals and 
mandate of section 326. As discussed above, implementation of CIPs and 
reasonable procedures related thereto under this proposed rule is 
intended to assist in preventing, detecting, and prosecuting money 
laundering and the financing of terrorism by specifying the information 
investment advisers must obtain from or about customers that can be 
used to verify the identity of the customers. We assess that this 
proposed rule would make it more difficult for persons to use false 
identities to establish customer relationships with investment advisers 
for the purposes of laundering money or moving funds to effectuate 
illegal activities, such as financing terrorism. Establishing different 
conditions for large and small advisers even though advisers of every 
type and size must open accounts for customers would negate these 
benefits.
    Regarding the third alternative, we believe the rule as proposed is 
clear and that further clarification, consolidation, or simplification 
of the compliance requirements is not necessary. As discussed above, 
the proposed rule would require advisers to, among other things, adopt 
and implement procedures to verify the identity of any customer, to the 
extent reasonable and practicable; maintain and retain records of the 
information used to verify the customer's identity; and determine 
whether the customer appears on any lists of known or suspected 
terrorists or terrorist organizations provided by any Federal 
government agency.\135\ The proposed rule would serve as an explicit 
requirement for firms to adopt and implement a comprehensive CIP.
---------------------------------------------------------------------------

    \135\ See proposed 31 CFR 1032.220. See also supra section II.
---------------------------------------------------------------------------

    Regarding the fourth alternative, we determined to use performance 
standards rather than design standards. Performance standards allow for 
increased flexibility in the methods firms can use to achieve the 
objectives of the requirements. Design standards

[[Page 44594]]

specify the behavior or manner of compliance that regulated entities 
must adopt. Although the proposed rule would require policies and 
procedures that are reasonably designed to address a certain number of 
elements, we do not place certain conditions or restrictions on how to 
adopt and implement such policies and procedures. The general elements 
are designed to enumerate core areas that advisers must address when 
adopting and implementing a CIP. As discussed above, given the number 
and varying characteristics of advisers, firms would need the ability 
to design their CIPs in a manner appropriate for their size and 
business. The proposed rule therefore would allow advisers to address 
the general elements based on the types of accounts they maintain, the 
various methods of opening accounts, and the types of identifying 
information that are available. The proposed rule would also provide 
flexibility for advisers to determine the personnel who would implement 
and oversee the effectiveness of their CIPs.

G. Solicitation of Comments

    FinCEN and the Commission encourage written comments on the matters 
discussed in this IRFA. We solicit comment on the number of small 
entities subject to the proposed rule. We also solicit comment on the 
potential effects discussed in this analysis; and whether this proposal 
could have an effect on small entities that has not been considered. We 
request that commenters describe the nature of any effect on small 
entities and provide empirical data to support the extent of such 
effect.

VII. Considerations of the Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \136\ we must advise OMB whether a proposed 
regulation constitutes a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results in or is likely to 
result in (1) an annual effect on the economy of $100 million or more; 
(2) a major increase in costs or prices for consumers or individual 
industries; or (3) significant adverse effects on competition, 
investment, or innovation. We request comment on whether this proposal 
would be a ``major rule'' for purposes of the SBREFA. We also request 
comment on the potential effect of the proposed rule on the U.S. 
economy on an annual basis; any potential increase in costs or prices 
for consumers or individual industries; and any potential effect on 
competition, investment, or innovation. Commenters are requested to 
provide empirical data and other factual support for their views to the 
extent possible.
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    \136\ Public Law 104-121, tit. II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

VIII. FinCEN's Regulatory Impact Analysis

    Executive Orders 12866, 13563, and 14094 (that is, E.O. 12866 and 
its amendments) direct agencies to assess the 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).\137\ E.O. 13563 emphasizes 
the importance of quantifying both costs and benefits, reducing costs, 
harmonizing rules, and promoting flexibility. E.O. 13563 also 
recognizes that some benefits are difficult to quantify and provides 
that, where appropriate and permitted by law, agencies may consider and 
discuss qualitatively values that are difficult or impossible to 
quantify.\138\
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    \137\ The SEC was not required to perform a regulatory impact 
analysis.
    \138\ Executive Order 13563, 76 FR 3821 (Jan. 21, 2011), section 
1(c) (``Where appropriate and permitted by law, each agency may 
consider (and discuss qualitatively) values that are difficult or 
impossible to quantify, including equity human dignity, fairness, 
and distributive impacts, and distributive impacts.'').
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    FinCEN has designated this proposed rule a ``significant regulatory 
action;'' accordingly, it has been reviewed by the Office of Management 
and Budget (``OMB'').
    FinCEN believes that the primary costs of complying with the 
proposed rule are considered in the Analysis of the Costs and Benefits 
Associated with the Proposed Rule described in detail in section IV and 
the Paperwork Reduction Act (44 U.S.C. 3507(d)) burden estimates 
described in detail in section V, which amount to a new annual 
aggregate burden (RIAs and ERAs) of 3,800,990 hours with 
$404,045,339.05 in internal time costs, and $48,446,969.76 in estimated 
total new annual external cost burden.
    As discussed above in sections IV and V, benefits of this proposed 
rule are expected to include reduced money laundering and terrorist 
financing occurring through the U.S. financial system. Overall, the 
proposed rule would benefit law enforcement by improving their ability 
to investigate, prosecute and disrupt the financing of international 
terrorism and other priority transnational security threats, as well as 
other types of transnational financial crime. Obtaining and verifying 
the identity of account holders or responding to circumstances in which 
the investment adviser cannot form a reasonable belief that it knows 
the true identity of a customer would reduce the risk of terrorists and 
other criminals accessing U.S. financial markets to launder money, 
finance terrorism, or move funds for other illicit purposes. The 
proposed rule would also help investment advisers to identify and 
prevent criminal activity including by allowing investment advisers to 
identify high risk customers. While it is difficult to estimate the 
economic losses that would be prevented by reducing money laundering 
and other financial crimes through this rule, the prevention of such 
crimes would reduce the monetary and nonmonetary harms they cause.
    As an alternative to the proposed rule, as discussed in section IV, 
FinCEN considered requiring investment advisers use the LEI or some 
other uniform standard as the identifier for such customers. While 
using the LEI would assist investment advisers and law enforcement 
agencies to detect money laundering than using a number of identifiers, 
the proposed rule's application to direct customers rather than 
beneficial owners limits the benefit of using LEIs. Further, natural 
persons could not use this identifier, meaning compliance with the 
proposed rule would require the collection of different types of 
identifiers.
    Regarding costs, as noted above in sections IV and V, in accordance 
with section 326 of the USA PATRIOT ACT, the proposed rule would 
require an investment adviser to establish and implement its CIP 
according to its specific circumstances and do not set inflexible 
requirements for all advisers. Further, the proposed requirements are 
similar to those for other financial institutions with which investment 
advisers engage; complying with the proposed rule may therefore create 
minimal additional costs in certain lines of business. Some RIAs and 
ERAs may have reduced costs because they may already perform certain 
AML/CFT functions because they are dual registrants or affiliated with 
a bank or broker-dealer. Finally, per the analysis above in sections IV 
and V, investment advisers may deem the requirements of the proposed 
rule with respect to its business relationship with a mutual fund to be 
satisfied if the customer (i.e., the mutual fund that it advises) has 
developed and implemented a CIP that is compliant with the investment 
company's CIP requirements.

[[Page 44595]]

    The costs incurred by the proposed rule would arise through the 
following requirements: establishing a CIP; obtaining and verifying 
identifying information; determining whether customers appear on a 
federal government list; providing notice to customers; recordkeeping; 
and reliance on another financial institution. Overall, FinCEN 
estimates that the average total cost to an ERA with two customers to 
comply with the proposed rules would be an internal cost burden of 
$1,675, with most ERAs facing total annual ongoing external costs of 
$654, while the average total internal cost for an RIA with 100 
customers would be $26,468, with most RIAs facing total ongoing annual 
external cost burdens of $4,088.
    Given the analysis included in the preceding sections, FinCEN 
believes that the benefits of this rule would exceed the costs.

IX. FinCEN's Unfunded Mandates Reform Act Determination

    FinCEN has analyzed the rule under the factors set forth in the 
Unfunded Mandates Reform Act (``UMRA'') (section 202(a)). Under this 
analysis, FinCEN considered whether the proposed rule 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 
$100,000,000 or more (adjusted annually for inflation) in any 1 year.'' 
\139\ The current threshold after adjustment for inflation is $176 
million, using the 2022 GDP price deflator. The proposed rule would 
result in an expenditure in at least one year that meets or exceeds 
this amount.
---------------------------------------------------------------------------

    \139\ 2 U.S.C. 1532(a).
---------------------------------------------------------------------------

    FinCEN further estimates total aggregate industry costs of: 
$404,045,339.05 in internal time costs and $48,446,969.76 in annual 
external time costs.\140\ 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 cost benefit analysis in 
section IV. Analysis of the Costs and Benefits Associated with the 
Proposed Rule, provides the analysis required by UMRA.
---------------------------------------------------------------------------

    \140\ See the PRA analysis in Table 1, infra section V.B.
---------------------------------------------------------------------------

Authority and Issuance

    For the reasons set forth in the preamble, FinCEN and the SEC 
propose to add part 1032 to chapter X in title 31 of the Code of 
Federal Regulations to read as follows:

PART 1032--RULES FOR INVESTMENT ADVISERS

Subpart A--General
Sec.
1032.100 Definitions
1032.101-1032.199 [Reserved]
Subpart B--Programs
1032.220 Customer identification programs for registered investment 
advisers and exempt reporting advisers.

    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--General


Sec.  1032.100  Definitions.

    Refer to Sec.  1010.100 of this chapter for general definitions not 
noted herein. To the extent there is a differing definition in Sec.  
1010.100, the definition in this section is what applies to part 1032. 
Unless otherwise indicated, for purposes of this part:
    (a) Account. For purposes of Sec.  1032.220:
    (1) Account means any contractual or other business relationship 
between a person and an investment adviser under which the investment 
adviser provides investment advisory services.
    (2) Account does not include:
    (i) An account that the investment adviser acquires through any 
acquisition, merger, purchase of assets, or assumption of liabilities.
    (ii) [Reserved]
    (b) Commission means the United States Securities and Exchange 
Commission.
    (c) Customer. For purposes of Sec.  1032.220:
    (1) Customer means:
    (i) A person that opens a new account; and
    (ii) An individual who opens a new account for:
    (A) An individual who lacks legal capacity, such as a minor; or
    (B) An entity that is not a legal person, such as a civic club.
    (2) Customer does not include:
    (i) A financial institution regulated by a Federal functional 
regulator or a bank regulated by a State bank regulator;
    (ii) A person described in Sec.  1020.315(b)(2) through (4) of this 
chapter; or
    (iii) A person that has an existing account with the investment 
adviser, provided the investment adviser has a reasonable belief that 
it knows the true identity of the person.
    (d) Financial institution is defined at 31 U.S.C. 5312(a)(2) and 
(c)(1) and its implementing regulation in Chapter X of Title 31.
    (e) Investment adviser. Any person who is registered or required to 
register with the Commission under section 203 of the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-3(a)), or any person that is exempt 
from Commission registration under sections 203(l) or 203(m) of the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-3(l), (m)).

Subpart B--Programs


Sec.  1032.220  Customer identification programs for registered 
investment advisers and exempt reporting advisers.

    (a) Customer identification program: minimum requirements--(1) In 
general. An investment adviser must establish, document, and maintain a 
written customer identification program (``CIP'') appropriate for its 
size and business that, at a minimum, includes each of the requirements 
of paragraphs (a)(1) through (5) of this section. The CIP must be a 
part of the investment adviser's anti-money laundering/countering the 
financing of terrorism compliance program required under the 
regulations implementing 31 U.S.C. 5318(h). The investment adviser may 
deem these requirements satisfied for any mutual fund (as defined in 31 
CFR 1010.100(gg)) it advises that has developed and implemented a CIP 
compliant with the CIP requirements applicable to mutual funds under 
another provision of this subpart.
    (2) Identity verification procedures. The CIP must include risk-
based procedures for verifying the identity of each customer to the 
extent reasonable and practicable. The procedures must enable the 
investment adviser to form a reasonable belief that it knows the true 
identity of each customer. The procedures must be based on the 
investment adviser's assessment of the relevant risks, including those 
presented by the various types of accounts maintained by the investment 
adviser, the various methods of opening accounts provided by the 
investment adviser, the various types of identifying information 
available and the investment adviser's size, location, and customer 
base. At a minimum, these procedures must contain the elements 
described in this paragraph (a)(2).
    (i) Customer information required--(A) In general. The CIP must 
contain procedures for opening an account that specify the identifying 
information that will be obtained with respect to each customer. Except 
as permitted by paragraphs (a)(2)(i)(B) and (C) of this section, the 
investment adviser must obtain, at a minimum, the following information 
prior to opening an account:

[[Page 44596]]

    (1) Name;
    (2) Date of birth, for an individual; or date of formation, for a 
person that is not an individual.
    (3) Address, which shall be
    (i) For an individual, a residential or business street address;
    (ii) For an individual who does not have a residential or business 
street address, an Army Post Office (APO) or Fleet Post Office (FPO) 
box number, or the residential or business street address of next of 
kin or of another contact individual; or
    (iii) For a person other than an individual (such as a corporation, 
partnership, or trust), a principal place of business, local office, or 
other physical location; and
    (4) Identification number, which shall be:
    (i) For a U.S. person, a taxpayer identification number; or
    (ii) For a non-U.S. person, one or more of the following: a 
taxpayer identification number; passport number and country of 
issuance; alien identification card number; or number and country of 
issuance of any other government-issued document evidencing nationality 
or residence and bearing a photograph or similar safeguard. For a non-
U.S. person that is not an individual and that does not have an 
identification number, the investment adviser must request alternative 
government-issued documentation certifying the existence of the person.
    (B) Exception for persons applying for a taxpayer identification 
number. Instead of obtaining a taxpayer identification number from a 
customer prior to opening an account, the CIP may include procedures 
for opening an account for a person that has applied for, but has not 
received, a taxpayer identification number. In this case, the CIP must 
include procedures to confirm that the application was filed before the 
person opens the account and to obtain the taxpayer identification 
number within a reasonable period of time after the account is opened.
    (ii) Customer verification. The CIP must contain procedures for 
verifying the identity of each customer, using information obtained in 
accordance with paragraph (a)(2)(i) of this section, within a 
reasonable time before or after the customer's account is opened. The 
procedures must describe when the investment adviser will use 
documents, non-documentary methods, or a combination of both methods, 
as described in this paragraph (a)(2)(ii).
    (A) Verification through documents. For an investment adviser 
relying on documents, the CIP must contain procedures that set forth 
the documents the investment adviser will use. These documents may 
include:
    (1) For an individual, an unexpired government-issued 
identification evidencing nationality or residence and bearing a 
photograph or similar safeguard, such as a driver's license or 
passport; and
    (2) For a person other than an individual (such as a corporation, 
partnership, or trust), documents and any amendments thereto showing 
the existence of the entity, such as certified articles of 
incorporation, a government-issued business license, a partnership 
agreement, or a trust instrument.
    (B) Verification through non-documentary methods. For an investment 
adviser relying on non-documentary methods, the CIP must contain 
procedures that set forth the non-documentary methods the investment 
adviser will use.
    (1) These methods may include contacting a customer; independently 
verifying the customer's identity through the comparison of information 
provided with respect to the customer with information obtained from a 
consumer reporting agency, public database, or other source; checking 
references with other financial institutions; or obtaining a financial 
statement.
    (2) The investment adviser's non-documentary procedures must 
address situations where an individual is unable to present an 
unexpired government-issued identification document that bears a 
photograph or similar safeguard; the investment adviser is not familiar 
with the documents presented; the account is opened without obtaining 
documents; the customer opens the account without meeting in person; 
and the investment adviser is otherwise presented with circumstances 
that increase the risk that the investment adviser will be unable to 
verify the true identity of a customer through documents.
    (C) Additional verification for certain customers. The CIP must 
address situations where, based on the investment adviser's risk 
assessment of a new account opened by a customer that is not an 
individual, the investment adviser will obtain information about 
individuals with authority or control over such account in order to 
verify the customer's identity. This verification method applies only 
when the investment adviser cannot verify the true identity of a 
customer that is not an individual using the verification methods 
described in paragraphs (a)(2)(ii)(A) and (B) of this section.
    (iii) Lack of verification. The CIP must include procedures for 
responding to circumstances in which the investment adviser cannot form 
a reasonable belief that it knows the true identity of a customer. 
These procedures should describe:
    (A) When the investment adviser should not open an account;
    (B) The terms under which the investment adviser may provide 
advisory services to the customer while the investment adviser attempts 
to verify the customer's identity;
    (C) When the investment adviser should close an account after 
attempts to verify a customer's identity fail; and
    (D) When the investment adviser should file a Suspicious Activity 
Report in accordance with applicable law and regulation.
    (3) Recordkeeping. The CIP must include procedures for making and 
maintaining a record of all information obtained under procedures 
implementing paragraph (a) of this section.
    (i) Required records. At a minimum, the record must include:
    (A) All identifying information about a customer obtained under 
paragraph (a)(2)(i) of this section,
    (B) A description of any document that was relied on under 
paragraph (a)(2)(ii)(A) of this section, noting the type of document, 
any identification number contained in the document, the place of 
issuance, and if any, the date of issuance and expiration date;
    (C) A description of the methods and results of any measures 
undertaken to verify the identity of a customer under paragraphs 
(a)(2)(ii)(B) and (C) of this section; and
    (D) A description of the resolution of each substantive discrepancy 
discovered when verifying the identifying information obtained.
    (ii) Retention of records. The investment adviser must retain the 
records made under paragraph (a)(3)(i)(A) of this section for 5 years 
after the date the account is closed and the records made under 
paragraphs (a)(3)(i)(B), (C), and (D) of this section for 5 years after 
the record is made.
    (4) Comparison with government lists. The CIP must include 
reasonable procedures for determining whether a customer appears on any 
list of known or suspected terrorists or terrorist organizations issued 
by any Federal Government agency and designated as such by Treasury in 
consultation with the Federal functional regulators. The procedures 
must require the investment adviser to make such a determination within 
a reasonable period of time after the account is opened, or earlier if

[[Page 44597]]

required by another Federal law or regulation or Federal directive 
issued in connection with the applicable list. The procedures also must 
require the investment adviser to follow all Federal directives issued 
in connection with such lists.
    (5)(i) Customer notice. The CIP must include procedures for 
providing customers with adequate notice that the investment adviser is 
requesting information to verify their identities.
    (ii) Adequate notice. Notice is adequate if the investment adviser 
generally describes the identification requirements of this section and 
provides such notice in a manner reasonably designed to ensure that a 
prospective customer is able to view the notice, or is otherwise given 
notice, before opening an account. For example, depending upon the 
manner in which the account is opened, an investment adviser may post a 
notice on its website, include the notice in its account applications, 
or use any other form of oral or written notice.
    (iii) Sample notice. If appropriate, an investment adviser may use 
the following sample language to provide notice to its customers:

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT

    To help the government fight the funding of terrorism and money 
laundering activities, Federal law requires all financial 
institutions to obtain, verify, and record information that 
identifies each natural or legal person who opens an account, which 
may be an individual or a person other than an individual (such as a 
corporation, partnership, or trust).
    What this means for you: When you open an account, we will ask 
for the name, address, date of birth or formation, tax 
identification number, and other information pertaining to the 
accountholder. This information will help us verify the identity of 
the accountholder. We may also ask to see identifying documents 
pertaining to the accountholder, such as a driver's license (if you 
are an individual) or a business license, articles of incorporation, 
or trust instrument (if the accountholder is not an individual).

    (6) Reliance on another financial institution. The CIP may include 
procedures specifying when the investment adviser will rely on the 
performance by another financial institution (including an affiliate) 
of any procedures of the investment adviser's CIP with respect to any 
customer of the investment adviser that is opening, or has opened, an 
account or has established an account or similar business relationship 
with the other financial institution to provide or engage in services, 
dealings, or other financial transactions, provided that:
    (i) Such reliance is reasonable under the circumstances;
    (ii) The other financial institution is subject to a rule 
implementing 31 U.S.C. 5318(h) and regulated by a Federal functional 
regulator; and
    (iii) The other financial institution enters into a contract with 
the investment adviser requiring it to certify annually to the 
investment adviser that it has implemented its anti-money laundering/
countering the financing of terrorism program, and that it will perform 
(or its agent will perform) specified requirements of the investment 
adviser's CIP.
    (b) Exemptions. The Commission, with the concurrence of the 
Secretary, may by order or regulation exempt any investment adviser or 
any type of account from the requirements of this section. The 
Secretary, with the concurrence of the Commission, may exempt any 
investment adviser or any type of account from the requirements of this 
section. In issuing such exemptions, the Commission and the Secretary 
shall consider whether the exemption is consistent with the purposes of 
the Bank Secrecy Act, and in the public interest, and may consider 
other necessary and appropriate factors.
    (c) Effective date. The effective date is [DATE 60 DAYS AFTER DATE 
OF PUBLICATION OF THE FINAL RULE IN THE FEDERAL REGISTER]. An 
investment adviser must develop and implement a CIP that complies with 
the requirements of this section on or before [DATE 6 MONTHS AFTER 
EFFECTIVE DATE OF FINAL RULE].
    (d) Other requirements unaffected. Nothing in this section relieves 
an investment adviser of its obligation to comply with any other 
provision of this chapter, including provisions concerning information 
that must be obtained, verified, or maintained in connection with any 
account or transaction.

    Dated: May 10, 2024.

    By the Financial Crimes Enforcement Network.
Andrea M. Gacki,
Director.

    Dated: May 13, 2024.

    By the Securities and Exchange Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-10738 Filed 5-17-24; 11:15 am]
BILLING CODE 4810-02-P