Will Anti-Money Laundering Regulations be Extended to Investment Advisers?

It has been more than a decade since the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) first proposed imposing anti-money laundering (“AML”) requirements on investment advisers. While FinCEN has yet to enact such a rule, the possibility of investment adviser AML regulations continues to lurk over the industry and a new proposed regulation may be in the works. 

FinCEN first proposed a rule extending AML regulations under the Bank Secrecy Act (“BSA”) to investment advisers in 2003, reasoning that investment advisers offered similar or substitute services to those offered by financial institutions regulated by the BSA.¹ However, the proposed rule never gained traction, and FinCEN withdrew it in 2008.² FinCEN stated that it intended to release a revised rule that would take into consideration concerns raised by the industry during the comment period for the 2003 proposed rule, as well as changes that had taken place in the financial industry in the interim.³ 

To date, FinCEN has not made a revised proposal public. However, recent commentary in an industry publication suggests FinCEN is finally prepared to do so and may have taken the first step by submitting a proposal to the White House Office of Management and Budget (“OMB”).⁴ No public release has been made and, if FinCEN did submit a proposal to OMB, it would be subject to 90-day OMB review period before any public release.⁵ The history of the proposed rule and AML regulations currently applicable to other financial institutions provide insight into what can be expected if FinCEN is indeed moving forward. 

It is likely that any new proposed rule will address concerns raised in the 2003 proposed rule’s comment period, including “the [] requirement to develop and implement an anti-money laundering program reasonably designed to prevent the investment adviser from being used by its clients for money laundering terrorist financing purposes, [and] the ability of an investment adviser to outsource BSA compliance to a third party.”⁶ Further, any new rule will likely address the extent to which managers of hedge funds will be regulated, if at all. 

Based on 2011 remarks of James H. Fries, Jr., FinCEN Director at the time, a new rule will likely require investment advisers to “establish AML programs and report suspicious activity.”⁷ Further, based on the content of the withdrawn 2003 rule, FinCEN would require investment advisers to implement (1) written policies, procedures, and internal controls for AML programs; (2) AML compliance officers to oversee the program; (3) ongoing training of staff; and (4) independent tests to ensure the AML program is working effectively. 

Over the past few years, large financial institutions have faced strident criticism and high profile regulatory enforcement actions based on allegations that they did not maintain proper AML compliance. In some high-profile instances, these enforcement actions have cost large banks billions of dollars in fines and bad press in the national spotlight. 

These cases illustrate that, if and when the day comes that investment advisers are required, as banks have been for many years, to complete suspicious activity reports, investment advisers will need to ensure that they take appropriate steps to avoid negative headlines and costly enforcement actions. It is important for investment advisers to stay ahead of what may be a significant new area of regulation. 

How Dechert Can Help 

Dechert is a market-leader in advising investment advisers regarding compliance with the myriad of regulations governing the industry. We also regularly advise banks and other financial institutions about AML issues. 

Footnotes 

_{1) Financial Crimes Enforcement Network; Withdrawal of the Notice of Proposed Rulemaking; Anti-Money Laundering Programs for Investment Advisers, 73 Fed. Reg. 214, 65568-65569 (Nov. 4, 2008).
2) Id.
3) Id.
4) According to Compliance Complete, on April 24, 2015, FinCEN sent a new proposed rule regulating investment advisers to the White House Office of Management and Budget (“OMB”). Brett Wolf, Exclusive: AML Rule for Advisers, Hedge Funds Under White House Review, COMPLIANCE COMPLETE, May 7, 2015. 
5) Id.
6) Financial Crimes Enforcement Network; Withdrawal of the Notice of Proposed Rulemaking; Anti-Money Laundering Programs for Investment Advisers, 73 Fed. Reg. 214, 65568-65569 (Nov. 4, 2008).
7) James H. Fries, Jr., Director, Fin. Crimes Enforcement Network, Remarks at the American Bankers Association / American Bar Association Money Laundering Enforcement Conference (Nov. 15, 2011), available at http://www.fincen.gov/news_room/speech/pdf/20111115.pdf}