Treasury Proposes New Compliance Obligations for Investment Advisers

A new proposed rule from the Treasury Department could make investment advisers subject to certain anti-money laundering and counter-terrorism financing requirements under the Bank Secrecy Act. The agency said the measures could close a loophole that allows sanctioned companies, including in China, to invest in U.S. companies and access sensitive technology.

The rule, issued Feb. 13 by the Financial Crimes Enforcement Network, looks to address the “patchwork of AML/CFT requirements” that creates ”regulatory gaps that criminals and foreign adversaries exploit to launder money, hide illicit wealth, and compromise American innovation,” FinCEN Director Andrea Gacki said. “This proposed rule would level the regulatory playing field, protect U.S. economic and national security, and safeguard American businesses.”

The agency is proposing adding certain investment advisers to the list of businesses classified as “financial institutions” under the BSA, which would require them to put in place AML/CFT programs. They would also be required to file suspicious activity reports, meet certain recordkeeping requirements and “fulfill other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulation,” the agency said.

In a fact sheet, FinCEN said sanctioned parties and others have used investment advisers as an “entry point to invest in U.S. securities, real estate, and other assets.” It specifically said companies and people from China and Russia invest in early-stage companies through advisers to “access sensitive information and emerging technology.”

Although some investment advisers may already be subject to AML/CFT requirements or voluntarily comply with them, “the lack of comprehensive AML/CFT requirements across the sector contributed to its vulnerability to illicit finance activity,” FinCEN said. It also said the investment adviser industry has nearly doubled “in assets under management” since the last time Treasury proposed similar measures in 2015. “The size and rapid growth of this sector underscore the importance of recalibrating the regulatory environment.”

The proposed rule would apply to investment advisers registered with the SEC or that report to the SEC as “exempt reporting advisers.” FinCEN said advisers are generally required to report to the SEC if they have over $110 million in assets under management, while exempt reporting advisers generally advise only private funds and have less than $150 million in managed assets in the U.S., or advise only venture capital funds.

FinCEN said it’s not yet proposing that investment advisers establish a “know your customer” program, but it plans to do so “in a future joint rulemaking with the SEC.” It also said the rule released this week doesn’t call on investment advisers to collect beneficial ownership information for certain customers, but it “anticipates addressing this requirement for investment advisers in a subsequent rulemaking.”

Investment advisers would be required to comply with the rule “on or before 12 months from the final rule’s effective date.” Comments are due April 15.