Registered Investment Advisors

On August 25, 2015, FinCEN (Financial Crimes Enforcement Network, issued a Notice of Proposed Rule Making (NPRM) for registered investment advisers to develop AML Programs and file Suspicious Activity Reports (SARs).

FinCEN is taking this action to regulate investment advisers that may be at risk for attempts by money launderers or terrorist financers seeking access to the U.S. financial system through a financial institution type that is currently not required to maintain AML programs or file suspicious activity reports (“SARs”).

The investment advisers FinCEN proposes to cover by these rules are those registered or required to be registered with the SEC. FinCEN is also proposing to include investment advisers into the general definition of “financial institution.” Doing so would subject investment advisers to the BSA requirements generally applicable to financial institutions, including, for example, the requirements to file Currency Transaction Reports (“CTRs”) and to keep records relating to the transmittal of funds. Finally, FinCEN is proposing to delegate its authority to examine investment advisers for compliance with these requirements to the SEC.

History of These AML Regulations 

On September 26, 2002, FinCEN published a notice of proposed rulemaking, proposing that unregistered investment companies establish AML programs. On May 5, 2003 FinCEN published another notice of proposed rulemaking, to require certain investment advisers to establish AML programs. In June 2007, FinCEN stated that it would be taking another look at how this proposed rulemaking was being implemented to ensure effective and efficient application for the industries covered by the statute. Therefore, they determined that it would not proceed without undertaking further public notice and go through the comment process. On November 4, 2008 FinCEN withdrew the First Proposed Investment Adviser Rule and the Proposed Unregistered Investment Companies Rule. Since these Notices were been withdrawn, there have been significant changes in the regulatory framework for investment advisers with the passage of the Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

Now on August 25, 2015, FinCEN re-issues the proposed AML regulations for registered investment advisers. The final regulations are not far behind and will not differ much from what you see in the proposed regulations. They have already received most of the questions and concerns with this industry and have spoken to large companies in the industry and the SEC, so they know that what they have proposed here is what the final regulations will look like. It’s been years in the making and will be law in the very near future.

I’m sure that you, as an investment adviser, knows this, but just in case, here are some numbers. As of June 2, 2014, there were 11,235 investment advisers registered with the SEC, reporting approximately $61.9 trillion in assets for their clients. That is an incredible amount of money and a money laundering haven for the criminal and very easy to hide 15 or 20 million. Investment advisers provide advisory services to many different types of clients, including individuals, institutions, pension plans, corporations, trusts, foundations, mutual funds, private funds, and other pooled investment vehicles.

Although these were only proposed regulations and FinCEN has not yet issued the final rule on this industry, all investment advisers should train their employees to detect and avoid any type of illegal funds or transactions.  As an investment adviser you can be certain that final AML regulations will be issued in the very near future. Because of this industry being easily accessible to the person with millions of illegal dollars, I am surprised that final regulations have taken this long. Even though the final regulations have yet to be issued, all registered (an unregistered) investment advisers should have a comprehensive AML Program and have their employees well trained in every aspect of detecting and reporting not only cash transactions, but also, suspicious activity.  They must know when something is out of the ordinary and just smells funny. And to what person they should report such activity.  Being able to call someone who is an Anti-Money Laundering Specialist / expert in this field would also be extremely helpful. The reason I say unregistered agents should also have an AML program is because even though you handle small amounts of money for your clients, does not make you immune to the bad guy. He may just have to work a little harder, but if he knows you are not registered and heavily regulated, it’s worth it to him to work a little harder to wash his money.

You are always responsible for the actions of each employee, but concern about that responsibility will diminish when the employees are adequately trained.  If you have an adequate AML Program, meaning that they are complying with the four minimum requirements and an employee, on his/her own, violates the law without it being detected by you or your office, you are still responsible, but not nearly as culpable as if they had taken no steps to comply.

“You can’t afford to have one of your employees go for the money”