IAA Recommends Changes to FinCEN’s Proposed AML Rule for Investment Advisers
Commentary by Rachael Hashmall
The Investment Adviser Association ("IAA") urged FinCEN to reconsider the scope of its proposal to include "investment adviser" in the definition of "financial institution" under the Bank Secrecy Act ("BSA"). The proposed rule would require advisers to implement AML/CFT programs and comply with recordkeeping requirements. (See related coverage.)
The IAA argued that the BSA "does not need to be extended to all investment advisers with respect to all of their activities in order to have a comprehensive AML regime in the United States." The IAA said that excluding certain clients and activities from the proposal would (i) strengthen SEC advisers’ AML programs by allowing them to use their finite resources to address higher-risk activities and (ii) avoid situations where imposing AML on SEC advisers would be duplicative of regulatory efforts where the costs and operational challenges of compliance will significantly outweigh the marginal benefits.
The IAA recommended that FinCEN consider the different types of SEC advisers and the diversity of their advisory activities and client bases. The IAA urged FinCEN to extend the BSA "only where doing so would fill a meaningful gap in our nation’s AML regime." Further, the IAA argued that (i) advisers are often only one of many financial institutions interfacing with clients, many of which are already required to perform initial and ongoing AML reviews of the client and (ii) advisers may have little or no direct contact with the ultimate client or may deal with clients whose operations pose little money laundering risk. According to the IAA, certain aspects of the proposal may not be necessary for SEC advisers, given that their services and/or client base do not pose AML risks that justify application of the "full array of AML program requirements contemplated by the proposal."
The IAA recommended that FinCEN:
- provide exclusions/exemptions from the AML program requirement for certain types of advisory business;
- ease the practical and operational burden on advisers in implementing AML programs;
- ease the practical and operational burden on SEC adviser affiliates of AML-Regulated entities;
- clarify SEC advisers’ Suspicious Activity Report (SAR) obligations;
- exempt SEC advisers from the recordkeeping and travel rules and special information sharing procedures;
- delegate examination authority to the SEC; and
- extend and stagger the implementation period in light of the interrelatedness of the proposal and other rulemakings, as well as reopen the comment period if interrelated rules are proposed before the proposal is finalized.
The IAA argued that FinCEN should review existing and future regulations that apply to financial institutions, and, where appropriate, consult with the investment adviser industry to ensure they are appropriate for SEC Advisers before applying them.
Commentary
FinCEN's proposal to include "investment adviser" in the definition of "financial institution" under the BSA has significant implications for registered investment advisers and exempt reporting advisers, among others. The proposed rule would certainly lead to increased operational costs and regulatory burdens, particularly for advisers whose activities and client bases do not present high AML risks. As the IAA noted, a collaborative effort between FinCEN, the SEC and industry stakeholders is important and can lead to a more effective solution that achieves the desired AML/CFT objectives without disproportionately impacting investment advisers.
The IAA highlights a core concern, also raised by Commissioner Peirce: there appears to be a lack of compelling evidence that warrants this expanded scope. Commissioner Peirce was blunt: "None of the justifications offered in support of this latest proposal is convincing or compelling." (See previous coverage.)
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The North American Securities Administrators Association supported a FinCEN proposal that would include "investment adviser" in the definition of "financial institution" under the Bank Secrecy Act. The proposed expansion of the definition would subject advisers to AML/CFT program and recordkeeping requirements.
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SEC Commissioner Hester M. Peirce urged FinCEN to drop a proposal that would include "investment adviser" in the definition of "financial institution" under the Bank Secrecy Act, which would, thereby, require advisers to implement AML/CFT programs and comply with recordkeeping requirements.
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FinCEN proposed to include "investment adviser" in the definition of "financial institution" under the Bank Secrecy Act. The proposed rule would require advisers to implement AML/CFT programs and maintain recordkeeping requirements.