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On August 28, 2024, the US Department of the Treasury\u2019s Financial Crimes Enforcement Network (FinCEN)\u00a0issued a final rule<\/a>\u00a0that expressly includes certain investment advisers in the definition of a \u201cfinancial institution\u201d under the Bank Secrecy Act (BSA) and its implementing regulations, which collectively establish the US anti-money laundering (AML) and counter-terrorism financing (CFT) regime. The final rule incorporates a substantial portion of the requirements included\u00a0in the\u00a0initial proposed rulemaking issued on February 13, 2024<\/a>, although certain key changes limit the scope of the final rule. The final rule does not encompass any rules related to the\u00a0customer identification program (CIP) proposed rulemaking<\/a>\u00a0issued on May 13, 2024.<\/p>\n According to the fact sheet released alongside the final rule, FinCEN believes the requirements will \u201caddress the current uneven application of AML\/CFT requirements across the investment adviser sector, which creates illicit finance risk and allows both legitimate and illicit investors to \u2018shop around\u2019 for an adviser who does not need to apply AML\/CFT controls, such as inquiring into the investor\u2019s source of wealth.\u201d<\/p>\n Investment advisers covered by the final rule are required to comply by January 1, 2026.<\/p>\n Who is covered?<\/strong><\/p>\n Consistent with the proposed rule, the final rule revises the definition of a \u201cfinancial institution\u201d under the BSA\u2019s implementing regulations to include:<\/p>\n The definition of an investment adviser under the final rule will\u00a0not<\/strong>\u00a0apply to the following:<\/p>\n FinCEN also limits the scope of the final rule for investment advisers whose principal office and place of business are outside of the US. In those cases, the requirements of the final rule only apply to activities that take place within the US (including through the involvement of the investment adviser\u2019s US personnel) or provide services to a US person or a foreign-located private fund with an investor that is a US person.<\/p>\n Key highlights of the final rule<\/strong><\/p>\n General AML\/CFT requirements<\/strong><\/p>\n Generally, the final rule requires covered investment advisers to implement an AML\/CFT program to combat money laundering and the financing of terrorism through the institution. In the commentary to the final rule, FinCEN reiterates that it is not requiring AML\/CFT programs to take a one-size-fits-all approach, but rather, such programs must be risk-based and reasonably designed to assure and monitor compliance with BSA\/AML requirements. Further, the program must be approved in writing by the investment adviser\u2019s board of directors or trustees, or other persons that perform similar functions. In addition, under the final rule, investment advisers must:<\/p>\n Differences from the proposed rule<\/strong><\/p>\n While the final rule implements much of the proposed rule, it contains several substantive changes (as well as a few incremental ones). In addition to limiting the definition of an investment adviser, key substantive differences between the proposed and final rules include:<\/p>\n Applicability to mutual funds and other regulated entities<\/strong>\u00a0\u2013 As in the proposed rule, investment advisers are not required to apply AML\/CFT program requirements to the mutual funds they advise. However, in the final rule, investment advisers also are not required to verify that the mutual funds have implemented an AML\/CFT program. Additionally, the final rule expands this exclusion to also apply to certain bank- and trust company-sponsored collective investment funds and any other investment adviser subject to the final rule that is advised by the investment adviser.<\/p>\n Implementation and oversight of AML\/CFT programs by US persons<\/strong>\u00a0\u2013 Unlike in the proposed rule, the final rule does not include language explicitly requiring that AML\/CFT programs established by investment advisers be the sole responsibility of personnel in the US that are accessible to \u2013 and subject to \u2013 the oversight and supervision of FinCEN. This \u201cduty provision\u201d is a new statutory requirement under the BSA. FinCEN proposed to address it in its recent\u00a0proposed rulemaking on modernizing AML programs<\/a>\u00a0for certain existing financial institution types, but did not address it in the final rule for investment advisers. Despite FinCEN not addressing the duty provision, the statutory obligation will still likely apply to investment advisers as financial institutions under the BSA, subject to any further interpretive guidance from FinCEN on this issue.<\/p>\n\n
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