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Another New Regulatory Burden Coming for RIAs

Just when advisors are absorbing the need to implement ERISA-level fiduciary standards for retirement accounts, there is another regulatory challenge coming down the pike.

The anti-money laundering rule proposed by the Department of the Treasury and the Financial Crimes Enforcement Network (FinCEN) will require RIAs, for the first time, to develop anti-money laundering rules and procedures, appoint a dedicated chief AML officer, report suspicious activity in client accounts, and keep additional records of clients' cash transactions.

Few RIA firms are prepared, or even aware, of the change, according to a panel of compliance executives speaking at TD Ameritrade Institutional’s conference for top advisors in California. And while the custodian will help its advisors understand what’s required, the law won’t allow them to do the monitoring or reporting of accounts for them.

“There is nothing here that allows you to rely on another institution,” said Susan Boudrot, chief compliance officer at TD Ameritrade. The feeling at FinCEN is that “the person who knows the client the best is the investment advisor. We don’t talk to your customer. You do."

Brokerage firms, like all financial institutions, have had to comply with the anti-money laundering rules for several years. Investment advisory firms were not, until now, included in FinCEN’s definition of “financial institution.”

The recent change, introduced last August, broadens the scope to include investment advisors registered with the SEC. It’s not yet clear when the rule will pass, but all indications are that it will, and it is likely to be within the next few months. RIAs will have six months after that to comply, Boudrot said.

The requirements for advisors to report suspicious activity is one part of the rule, but firms will also have to keep records of certain transactions, and put in place documented processes to ensure they are in compliance. “We’ve seen the breadth and scope of what (the SEC is) looking for increase,” said Jeff Weiss, the chief AML compliance officer at TD Ameritrade. “There will be a cost.”

The new rule will require RIAs to maintain currency transaction records in accounts they oversee, including cash deposits, currency exchanges, debit card withdrawals at ATMs and cash advances of more than $10,000 in a given day. 

Investment advisors will also be required to report any “suspicious transactions” greater than $5,000 that are conducted, or attempted, through the RIA. Advisors will have to sign up for access to the BSA E-Filing System via the FinCEN website in order to file their notes of suspicious activity.

The definition of suspicious is broad, Weiss said, and could include unusual withdrawals, money sent to unusual locations, or currency exchanges.

Advisory firms aren’t required to do an initial AML audit, but they really need to, said Weiss. Once potential risks have been identified, RIAs will need to monitor their accounts to find irregular activities and report them to FinCEN. After the program has been put in place, an annual audit is required.

RIAs will be required to name a chief AML officer or create an AML committee. Weiss warned that this is a position that must be held by an officer of the firm, and while that person need not be dedicated only to the AML rules, they’ll need to have a thorough understanding and write out the policies and procedures. “It can’t just be a person with another hat,” he said. Staff training will also be required. 

And while this so far only includes SEC-registered advisors (those with more than $100 million in assets), Boudrot stressed that state-registered advisors should be aware, as the rule could evolve to include those firms in the mandate as well.

Weiss said regulators understand the scope of the change and will be understanding if it takes firms awhile to get up to speed — at least for a while. “The SEC will be much more tolerant the first time than they will be a few years down the line,” he said.

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