BSA requirements for investment advisors

On February 13, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking (NPRM) requiring certain investment advisors to implement an anti-money laundering (AML) program and file suspicious activity reports (SARs) and currency transaction reports (CTRs). 

An NPRM is a public notification that announces the intent of a U.S. federal agency to add, remove or change a regulation. The NPRM process also allows the public to comment on the impending regulation. The U.S. Treasury issued a similar NPRM in 2015; however, it gained no traction at that time.

FinCEN stated that the size and rapid growth of this sector underscored the importance of recalibrating the regulatory environment and its commitment to complying with international Financial Action Task Force requirements. With the proposed rule, the U.S. Treasury extended the definition of “financial institution” to include investment advisors because they engage in activities similar to those that Bank Secrecy Act (BSA)-defined financial institutions engage in. 

Investment advisors are entities that provide advice to investors about securities for compensation as part of a regular business. Investment advisors provide their expertise to a wide range of clients, including retail investors, high-net-worth individuals, private institutions and governmental entities (including local, state and foreign government funds). Advisors typically provide ongoing advice about buying, selling and/or holding investments and will monitor the performance of clients’ investments and their alignment with clients’ overall investment objectives. Many clients grant their advisor the power to manage assets on a discretionary basis, meaning the advisor has the authority to decide which securities to purchase and sell for the client.

Under the proposed rule, investment advisors would be required to:

• Implement a risk-based AML and Countering (or Combatting) the Financing of Terrorism (CFT) program that contains the pillars of the BSA: policies and procedures, internal controls, employee training and independent testing.
• File SARs and CTRs.
• Comply with information sharing under Section 314(a), Section 311 and Section 312 under the USA Patriot Act.
• Comply with the funds transfer recordkeeping and travel rules.

While the February 2024 NPRM did not require compliance with the Customer Identification Program (CIP) rule, on May 13, 2024, FinCEN partnered with the Securities and Exchange Commission (SEC) to propose a rule to require investment advisors to comply with CIP requirements. This rule would require investment advisors to verify the identity of the person opening the account, maintain records of the information used to verify the identity and verify the person against a list of known or suspected terrorists.

Both rules only apply to investment advisors required to register with the SEC as registered investment advisors (RIAs) or report to the SEC as exempt reporting advisors (ERAs). An RIA must register if they have over $110 million in assets under management. ERAs are not required to register with the SEC but must report certain information if they advise only private funds, have less than $150 million in assets under management in the U.S. and advise only venture capital funds. 

FinCEN has been careful not to pile on additional or redundant requirements for investment advisors who provide serrvices to open-end investment companies such as mutual funds, which are already defined as “financial institutions” under the BSA, and because of the regulatory and practical relationship between mutual funds and their investment advisors, the proposed rule would not require investment advisors to apply AML/CFT program or SAR filing requirements to mutual funds they advise.

FinCEN stated that the proposed rules would significantly improve efforts to protect the U.S. financial system, provide highly useful information to law enforcement authorities and national security agencies and safeguard the investment advisor sector against illicit activity. Furthermore, the proposed rules would make it easier for U.S. investment advisors and the U.S. government to identify attempts by foreign adversaries to invest in early-stage companies with ties to important and sensitive technologies with national security implications.

How Wipfli can help

If you are an investment advisor who may be affected by this proposed rule change, we can help you stay in compliance. An independent audit and system validation of your BSA program can offer the guidance and support you need to help ensure everything is working as intended. Contact us today to get started.