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Investment Advisers Now Subject to AML Rule After Years of Discussion

Even with over two years to prepare, this new rule could be a heavy lift.
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On August 28, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a final rule that created an anti-money laundering (AML) program and suspicious activity reporting requirements for investment advisers (IAs) and exempt reporting advisers (ERAs). This new rule purports to close the gap that has existed for decades created by not defining IAs and ERAs as financial institutions (FI) subject to an AML rule. There was an initial Notice of Proposed Rule Making (NPRM) released in 2015 that appeared to die on the vine.1

A renewed NPRM was released in March 2024 where Treasury explained they had conducted a risk assessment as part of the U.S. Strategy on Countering Corruption. “The risk assessment found several cases in which sanctioned individuals, corrupt officials, tax evaders, and other criminal actors have used investment advisers as an entry point to invest in U.S. securities, real estate, and other assets. Treasury’s risk assessment also identified cases of foreign adversaries, including China and Russia, investing in early-stage companies through investment advisers to access sensitive information and emerging technology.”2

FinCEN reviewed the comments received and made some adjustments to the final rule.3 They adopted a narrower definition of “investment adviser” than what was originally proposed. It includes IAs registered with the Securities and Exchange Commission (SEC), also known as registered investment advisers (RIAs), which generally include IAs with more than US$110 million in assets under management (AUM). Also included are ERAs, which are IAs that advise private funds and have less than US$150 million AUM in the U.S. or advise only venture capital funds. Despite being exempt from SEC registration, ERAs must file certain information with the SEC and are included in the final rule. 

Excluded from the rule are RIAs that register with the SEC solely because they are midsize advisers or multistate advisers pension consultants. Also excluded are RIAs that are not required to report any AUM to the SEC on Form ADV. For IAs whose principal office is outside the U.S., the final rule would only apply to activities that either occur within the U.S. or with a U.S. person. Furthermore, the IA isn’t required to establish an office in the U.S. to perform the duties required by the rule. 

Final Rule Requirements 

The final rule outlines the requirements similar to other U.S. FIs: 

  1. Implement a risk-based and reasonably designed AML/CFT program.  
  2. File certain reports, such as Suspicious Activity Reports (SARs) with FinCEN. 
  3. Keep records, such as those relating to the transmittal of funds (e.g., comply with the Recordkeeping and Travel Rule). 
  4. Fulfill other obligations applicable to FIs subject to the Bank Secrecy Act and FinCEN’s implementing regulations, such as special information-sharing procedures. 

        RIAs and ERAs will be required to participate in FinCEN’s mandatory 314(a) process, have the option to participate in FinCEN’s voluntary 314(b) process4, and be subject to “special measures” imposed by FinCEN pursuant to Section 311 of the USA PATRIOT Act. 

        Final Rule Exclusions 

        In order to minimize the duplication of efforts for existing AML/CFT programs, IAs can exclude from their obligations any mutual fund advised by the IA. The IA does not need to verify that the mutual fund has implemented its own AML/CFT program. Furthermore, the IA can exclude from its obligations any bank and trust company-sponsored collective investment funds as well as any other IA that is subject to the AML Final Rule. The rule is effective January 1, 2026, with firms expected to comply by January 1, 2027. The rule delegates FinCEN’s examination authority for compliance requirements to the SEC. 

        What This All Means 

        Even with over two years to prepare, this new rule could be a heavy lift for many RIAs and ERAs, as many have very limited AML frameworks in place today. RIAs that are affiliated with broker-dealers and banks or those with a global footprint potentially have a head start since they often have more advanced compliance programs already in place. Whereas, ERAs historically have had limited requirements under the Adviser Act and will likely need to build their programs from scratch. 

        Even the most robust programs today often focus primarily on Know Your Customer and Customer Due Diligence activities but fall short of the requirements for monitoring transactions for suspicious activity, SAR filing, information-sharing provisions, and recordkeeping requirements. RIAs and ERAs will need to conduct an inventory of resources, processes, and technology systems they have today and determine what they will need to set up an adequate risk-based program. A few actions that need to occur include the following: 

        • Most RIAs and ERAs have not previously hired talent with an eye toward AML Compliance knowledge and experience. IAs will need to determine what breadth and depth of hiring will need to occur to fill potential knowledge gaps in the AML space.  
        • Depending on size, they may need to consider implementing technology solutions to support transaction monitoring, report filing, and recordkeeping requirements. Now would be a good time to talk with industry peers and solution providers to understand better the capabilities required and offered.  
        • They will need to purchase or develop AML training for their personnel.  
        • They will also need to set up a cadence for testing controls that are part of the overall AML program.  
        • Even when the investment adviser’s program falls under programs of associated FIs, it is recommended to complete a risk assessment specific to the RIA or ERA and customize the program accordingly. 

        Some firms may choose to delegate their responsibilities to a third party. Although this may be a more cost-effective option, especially for smaller firms, the RIA or ERA remains ultimately responsible for any identified gaps or program deficiencies. FinCEN has been very clear that it is not sufficient to rely on contractual provisions or certifications as a means to transfer responsibility. Firms choosing to utilize a third party must have robust third-party due diligence practices in place. 

        Resources are publicly available for those choosing to build programs in-house. A good starting point could be the SEC AML Source Tool. Originally established for broker-dealers, this tool provides a solid overview of program requirements and associated source documents. In addition, FINRA has created an AML template for small firms that many of their members use to help provide the framework to establish their programs. It is also a tool created for broker-dealers, but it can help provide the basic structure for RIAs and ERAs to build upon. 

        Moving Forward 

        This rule has been the topic of discussion for many years, and now that it is finally here, it is creating some angst in those who have never been subject to an AML rule. IAs want to get this right, but many are starting from scratch with little to no in-house resources to begin the process. There are costs affiliated with standing up a program and maintaining compliance. These costs need to be factored into the firm’s overall budget now and in the future. Another important factor is to limit customer impact as much as possible to ensure IAs are meeting the top-tier customer experience they strive to provide. It’s going to be a learning process for an entire industry. Fortunately, there are resources to tap through this journey. 

        Whether you need assistance developing your program or determining the best technology solutions, Datos Insights is here to help. We also plan to continue the discussion as additional guidance unfolds, with a brief to be published in early 2025.

        1. “FinCEN Proposes AML Regulations for Investment Advisers,” August 25, 2015, accessed September 24, 2024, https://www.fincen.gov/news/news-releases/fincen-proposes-aml-regulations-investment-advisers. ↩︎
        2. “Fact Sheet: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers Notice of Proposed Rule Making (NPRM),” February 13, 2024, accessed September 24, 2024, https://www.fincen.gov/news/news-releases/fact-sheet-anti-money-laundering-program-and-suspicious-activity-report-filing. ↩︎
        3. “FinCEN Issues Final Rules to Safeguard Residential Real Estate, Investment Adviser Sectors from Illicit Finance,” August 28, 2024, accessed September 24, 2024, https://www.fincen.gov/news/news-releases/fincen-issues-final-rules-safeguard-residential-real-estate-investment-adviser. ↩︎
        4. See Datos Insights’ report The Conundrum of Information Sharing and Section 314 of the USA PATRIOT Act, December 2023. ↩︎

        About the Author

        Becki LaPorte

        Becki LaPorte

        Becki LaPorte is a Strategic Advisor in the Fraud & AML practice at Datos Insights, covering the spectrum of financial crime matters. Becki brings more than 25 years of financial crime compliance and business experience. She spent several years working in the banking industry before transitioning her career to the securities industry. She served as an Associate Director and Lead...

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