SEC and FinCEN Propose CIP Requirements for RIAs and ERAs
Commentary by Thomas Delaney
The Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN") and the SEC jointly proposed a rule that would require SEC-registered investment advisers ("RIAs") and exempt reporting advisers ("ERAs") to establish, document and maintain written customer identification programs ("CIPs").
The proposed rule would require SEC-registered RIAs and exempt reporting ERAs to, among other things, implement a CIP that includes procedures for:
- verifying the identity of each customer to the extent reasonable and practicable; and
- maintaining records of the information used to verify a customer’s identity, including name, address and other identifying information.
The proposed rule complements a separate FinCEN proposal in February 2024 to designate RIAs and ERAs as "financial institutions" under the Bank Secrecy Act and subject them to AML/CFT program requirements and suspicious activity report filing obligations, among other requirements. (See related coverage.)
FinCEN stated that the proposal is designed to "prevent illicit finance activity involving the customers of investment advisers by strengthening the anti-money laundering and countering the financing of terrorism framework for the investment adviser sector."
Comments are due 60 days after publication in the Federal Register.
Commentary
This proposal is the second shoe to drop in terms of the SEC and FinCEN's initiative to impose AML program requirements on RIAs and ERAs. In February FinCEN issued a Notice of Proposed Rulemaking that would require RIAs and ERAs to adopt AML compliance programs that include procedures for identifying suspicious transactions and filing SARs.
A CIP rule is a fundamental aspect in terms of enabling financial institutions to be confident that they understand the identity of their customers and are able to confirm that such customers are not known criminals or engage in terrorist financing. This is a requirement that banks and broker-dealers have been living with for many years and the proposed rule is consistent with those requirements.
The proposal is disappointing because, like the measures in place for banks and broker dealers, the proposed CIP process is document intensive, requiring, for example, that individual customers for RIAs and ERAs provide copies of government issued IDs that have a picture and contain a physical address, rather than encouraging the use technological options including AI, to confirm customer identity.