Last week, the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) proposed a rule to require investment advisors to comply with Bank Secrecy Act requirements, including implementing anti-money laundering (“AML”) controls and filing suspicious activity reports to FinCEN.  The agency has attempted to bring investment advisors under Bank Secrecy Act provisions twice in the past, most recently in 2015.  Unlike prior attempts, however, this proposal does not hold investment advisors accountable for identifying their clients.  Still, the agency is contemplating a separate joint proposal with the SEC outlining future customer ID requirements for investment advisors.

Filing the occasional SAR to FinCEN is probably not a big deal to most RIAs, but customer ID requirements would be

Dropping the client identification requirement (at least initially) might increase the likelihood of this proposal getting passed, and RIAs should be prepared for this possibility.  Historically, investment advisory firms have been largely exempted from AML regulations arising from the Bank Secrecy Act, which currently applies to banks and certain other financial institutions.  The new rules would require RIAs to file Suspicious Activity Reports or “SARs” to FinCEN and disclose additional information about their clients under certain circumstances.  The ~17,000 state-registered investment advisory firms not regulated by the SEC (typically those with less than $100 million in AUM) would be exempt from these requirements and could be incentivized to delay or circumvent SEC registration to avoid compliance.

Filing the occasional SAR to FinCEN is probably not a big deal to most RIAs, but customer ID requirements would be.  RIAs care about confidentiality because their clients do.  Currently, there are no formal customer identification programs (like banks have) and no requirement that advisory firms report beneficial ownership information for clients that are legal entities like LLCs or LPs.  FinCEN said it intends to address both of these RIA loopholes in the near future.  Advisory firms should be on notice that they may have to disclose these changes to customer ID requirements to clients and prospects if these proposals become law.  It’s unlikely that clients will be thrilled about these potential changes, so articulating how their confidentiality will be maintained (except in cases requiring government disclosure) is probably the best course of action if these changes take place.

Will the third time be the charm for FinCEN to get AML proposals signed into law?  It’s hard to say, but there seems to be more of a push from regulators this time around

Will the third time be the charm for FinCEN to get AML proposals signed into law?  It’s hard to say, but there seems to be more of a push from regulators this time around, given the increase in international asset flows and lower regulatory burden of RIAs relative to other financial institutions.  FinCEN director Andrea Gacki recently told reporters, “Right now, there is a patchwork regulatory coverage in the investment advisor sector.  These regulation gaps allow illicit actors to shop around for an advisor who does not need to inquire about their source of wealth.”  Another senior FinCEN official noted that last week’s announcement comes amid a “tremendous surge in the use of investment advisors for illicit finance.  We’ve seen abuse of investment by nation-state actors, Russia, China…oligarchs relying on US investment advisors to move or hide their funds.”

While it’s unclear whether proposals from FinCEN or the SEC (or both) will come into law, it’s safe to assume that RIA regulations are set to increase.  Since both the SEC and FinCEN are pushing for higher customer ID requirements for the industry, there’s a good chance this will happen soon, so be prepared.  We’ll keep an eye on this and report back on any updates.

About Mercer Capital

We are a valuation firm that is organized according to industry specialization.  Our Investment Management Team provides valuation, transaction, litigation, and consulting services to a client base of RIAs, asset managers, and trust companies.

Special thanks to Andy Gibbs for the idea.