Advisor advocates quickly decried the U.S. Treasury’s proposed rules aimed at stopping money laundering and terrorist financing in the RIA space, framing the mandates as “sweeping and duplicative.”
The proposed rules, unveiled by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), would apply to advisors registered with the SEC and those reporting to the commission as exempt reporting advisors.
Under the new mandates, advisors must follow the strictures of the previously passed Bank Secrecy Act. The mandates include implementing anti-money laundering and countering the finance of terrorism programs, filing reports as needed (including Suspicious Activity Reports) with FinCEN and keeping records of transmitted funds, among other obligations.
In a fact sheet about the proposals, FinCEN acknowledged the RIA industry provides “an important service” for investors by driving opportunities and “supporting innovation, growth and prosperity” in the country.
“But investment advisers, in their role as gatekeepers to the U.S. financial system, are at risk of abuse by money launderers, corrupt officials and other bad actors,” the sheet read.
By floating the new rule, FinCEN is withdrawing a 2015 proposal detailing AML/CFT requirements for RIAs, partly due to the industry’s growth in the intervening years.
In 2021, the U.S. Treasury conducted a risk assessment on the RIA industry, finding “illicit finance and national security risks,” including instances where “sanctioned individuals, corrupt officials, tax evaders and other criminal actors” used RIAs to integrate themselves into U.S. securities, real estate and other assets.
The assessment also found countries like Russia and China invested in early-stage companies via RIAs to “access sensitive information and emerging technology.”
FinCEN acknowledged that some advisors may already be subject to AML/CFT requirements but felt that the lack of a uniform standard throughout the industry created weak points criminals could exploit.
FinCEN did not include a customer identification program requirement nor an obligation that RIAs collect beneficial ownership information for legal entity clients, expecting to partner with the SEC in future rulemaking. Since mutual funds already fall under the BSA, RIAs would not have to fulfill AML/CFT requirements for those funds they advise.
Additionally, the U.S. Treasury was planning to delegate its examination authority for the rule to the SEC, and the rule would not apply to state-regulated advisors who do not meet the asset threshold requiring SEC registration.
But the proposal would capture virtually “all investment advisers regardless of risk or gaps in the current framework,” according to Gail Bernstein, the general counsel for the Investment Adviser Association. Bernstein argued the rule would fail because it didn’t tailor itself to the “unique business models and risk profiles” of advisors.
“The (IAA) fully supports efforts to combat money laundering and terrorist financing, but these efforts must be risk-based and designed to fill identified gaps in the existing AML regulatory landscape rather than duplicate the protections that already exist,” Bernstein said.
Should it pass, advisors would have 12 months to comply from the final rule’s effective date, and the comment period for the proposal runs through April 15.