(Article from Registered Funds Regulatory Update, July 2024)
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The SEC and the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) jointly proposed a rule that would require SEC-registered investment advisers and those that report to the SEC as exempt reporting advisers to establish and maintain written customer identification programs (“CIPs”). The proposal is designed to prevent illicit finance activities by strengthening the anti-money laundering and countering the financing of terrorism (“AML/CFT”) framework for the investment adviser sector.
Under this proposal, investment advisers and exempt reporting advisers would be required, among other things, to implement reasonable procedures to identify and verify the identity of their customers in order to form a reasonable belief regarding their true identity. The proposed rule would make it more difficult for criminal actors to establish customer relationships, including by using false identities, with investment advisers for the purposes of laundering money, financing terrorism, or engaging in other illicit finance activities. The proposal is generally consistent with the CIP requirements for other financial institutions, such as broker-dealers. According to the proposal, the rule would apply to approximately 15,000 investment advisers and 5,550 exempt reporting advisers with $114 trillion in AUM and $5.2 trillion in gross assets, respectively.
This proposed rulemaking complements a separate FinCEN proposal made in February 2024 to designate investment advisers and exempt reporting advisers as “financial institutions” under the Bank Secrecy Act and subject them to, among other things, AML/CFT program requirements and suspicious activity report filing obligations. That proposal cited a risk assessment by the Treasury identifying the investment adviser industry as an access point into the U.S. market for illicit proceeds associated with criminal activities. Together, these proposals aim to prevent illicit finance activities in the investment adviser sector and further safeguard the U.S. financial system.
The proposed amendments are subject to comment until July 22, 2024. The proposed compliance date is 6 months from adoption.
Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers,
Release No. BSA-1; RIN 3235-AN34 (May 21, 2024), available at: https://www.govinfo.gov/content/pkg/FR-2024-05-21/pdf/2024-10738.pdf.