FinCEN Adopts Final Rule: AML Programs for Investment Advisers

On August 28, the US Department of the Treasury’s (Treasury Department) Financial Crimes Enforcement Network (FinCEN) issued a final rule that expands anti-money laundering (AML) and countering the financing of terrorism (CFT) program requirements to cover Securities and Exchange Commission (SEC) registered investment advisers (RIAs) and SEC exempt reporting advisers (ERAs) (collectively, Investment Advisers).

Background

The road to finalizing AML requirements applicable to Investment Advisers has been decades long. The rationale for the rulemaking is based, in part, on a risk assessment conducted by the Treasury Department, which noted that The People's Republic of China and the Russian Federation have sought to leverage investment advisers and their advised funds through investment in early stage companies to access certain technologies and services with national security implications.

Changes From the Proposed Rule and Core Requirements

In response to comments, FinCEN has narrowed the scope of investment advisers subject to the final rule. The final rule excludes from the definition of "investment adviser”:

• RIAs that register with the SEC solely because they are (i) “mid-sized advisers”; (ii) multi-state advisers; or (iii) pension consultants; and
• RIAs that are not required to report any AUM to the SEC on Form ADV (e.g., an adviser that does not directly manage client assets).

As proposed, the final rule continues to exclude state-registered investment advisers, foreign private advisers and family offices.

Under the final rule, “foreign-located investment advisers” (Investment Advisers that have a principal office and place of business outside of the United States) will be subject to the rule only to the extent that their advisory activities (i) take place in the United States, including through the involvement of US personnel of the investment adviser; or (ii) provide advisory services to a US person or a foreign-located private fund with a US person investor. In addition, the final rule does not include the proposed requirement that the person maintaining an investment adviser's AML program be located in the United States and subject to oversight by the Treasury and appropriate federal functional regulator.

The core requirements of the final rule remain largely as proposed. Investment Advisers must:

• Adopt and implement a written AML/CFT program (AML Program), approved by its board of directors or person(s) that serve a similar function, that is risk-based and reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing or other illicit financial activities;
• As part of the AML program, at a minimum:
  • establish and implement policies, procedures and internal controls reasonably designed to prevent the adviser from being used for money laundering and otherwise comply with Bank Secrecy Act (BSA) requirements;
  • provide for independent testing for compliance;
  • designate a person(s) responsible for implementing and monitoring operations and internal controls;
  • provide ongoing training for appropriate persons; and
  • implement appropriate risk-based procedures for conducting ongoing customer due diligence.
• File suspicious activity reports (SARs) (involving amounts of $5,000 or more); and
• File currency transaction reports (above $10,000 in currency in any one business day) and maintain certain records relating to transmittal of funds ($3,000 or more).

Final Thoughts

Investment Advisers will be required to comply with the final rule beginning January 1, 2026. RIAs and ERAs should evaluate their business models, the types of advisory activities they provide, and the associated AML-related risks presented – all when establishing, implementing and/or revising AML programs required under the final rule. In addition, Investment Advisers will need to develop risk-based procedures to monitor for SAR-triggering events. Finally, Investment Advisers should keep in mind that additional AML-related regulations remain on the horizon, including a joint SEC and FinCEN proposed rule that would require customer identification programs for investment advisers. 

Katten attorneys will review the final rule in more detail and provide additional insights over the coming months.