Copyright 2024 ORICAL LLC - Partner - Florio Leahy LLP (Affiliated Law Firm, Attorney Advertising)
Effective January 1, 2026, the vast majority of registered investment advisers (“RIAs”) and all exempt reporting advisers (“ERAs” and together with RIAs not excluded (“Advisers”)) will be “financial institutions” under regulations[1] issued by the Financial Crimes Enforcement Network (“FinCEN”) pursuant to the Bank Secrecy Act (“BSA”).[2] Advisers may be unwittingly complicit[3] in money-laundering and other illicit activity if they are not required to understand the origin of their investors’ funds or the nature of the owner of those funds. Advisers are now required to adopt a risk-based approach pursuant to which they must ask questions, particularly of their investors and prospective investors, and analyze potential money laundering, terrorist financing, and other illicit finance risks that are continuously evolving.
Consequently, and pursuant to the Final Rule described in FinCEN’s Adopting Release (the “Release”), Advisers are required to, among other things, (i) have an anti-money-laundering/countering the financing of terrorism (“AML/CFT”) program and (ii) file confidential suspicious activity reports (“SARs”) with FinCEN under certain circumstances. The Securities and Exchange Commission (“SEC”) is tasked with ensuring that Advisers fulfill their obligations under the BSA.[4]The Final Rule is intended to address the results of the U.S. Treasury’s 2024 Investment Adviser Risk Assessment.[5]As expected, Advisers will also have certain record keeping requirements as well.[6]
A minority of Advisers, those involved in one or more related transactions in currency of more than $10,000, are now obligated to file currency transaction reports (“CTRs”) in lieu of the current obligation of all investment advisers to file reports for the receipt of more than $10,000 in currency and certain negotiable instruments using joint FinCEN/Internal Revenue Service Form 8300.[7]
Advisers are also subject to special due diligence requirements for correspondent and private banking accounts, as well as certain prohibitions on correspondent banking and special measures under Section 311 of the USA PATRIOT Act and section 9714 of the Combating Russian Money Laundering Act,[8]including by amending the definitions in 31 CFR 1010.605 for “account” and “covered financial institutions” so that these definitions apply to Advisers. There is, however, an exclusion for business activities involving mutual funds, collective investment funds, and other investment advisers that Advisers advise and that are subject to this Final Rule.
This memorandum has been produced by Orical LLC to assist Advisers in understanding their obligations under the Final Rule. The text of the regulatory amendments, which addresses 31 CFR Parts 1010 and 1032, is appended to this memorandum as Exhibit A and is also available at the end of the Release. We’ve annotated the text to provide additional details concerning the AML/CFT program for Advisers. The SEC has provided a comprehensive Anti-Money Laundering (AML) Source Tool for Broker-Dealers and for Mutual Funds on its website. These Source Tools provide readers with a comprehensive view of the AML landscape but no such resource is available for Advisers. Also instructive are the SEC’s recent enforcement actions against broker-dealers and mutual funds which we have written about elsewhere and cite failures to have adequate policies; failures to conduct training and failures to file SARs.
The few Advisers excluded from the definition of “financial institution” in the Final Rule are: (i) mid-sized advisers; (ii) multi-state advisers; (iii) pension consultants; (iv) RIAs that report $0 assets under management on Form ADV; and (v) state registered investment advisers.[1]Advisers with a principal office and place of business outside of the United States (“foreign-located investment adviser”)[2] will only be subject to regulation with respect to their activities within the United States, including through involvement of U.S. personnel. Even one United States person as a direct or indirect (on an entity look-through basis) beneficial owner of a foreign located private fund will subject the Adviser to the requirements of the Final Rule and the BSA for that fund.
Because Advisers operate through a variety of business models, a generic AML/CFT program is not practical. Each Adviser must develop a program tailored to its business. Each Adviser must identify its exposure to money laundering, terrorist financing and other illicit activity risks, understand applicable BSA requirements; identify risk factors relating to these requirements; design internal policies, procedures and controls to assure compliance and periodically assess the effectiveness of the policies and controls. Advisers, other than foreign located Advisers, are required to apply an AML/CFT program to all advisory services provided to all customers, other than with respect to mutual funds, collective investment funds, and other Advisers subject to the Final Rule. The program would not apply to non-advisory services.[3]
The AML/CFT program requirements include the development and implementation of a written (and approved) AML/CFT program that is risk-based and reasonably designed to prevent the Adviser from being used for money laundering, terrorist financing or other illicit finance activities. The minimum program requirements[4] are set forth in section 1032.210(b) of the Final Rule and include: (i) the development of internal policies, procedures and controls; (ii) the designation of a compliance officer (one or more persons); (iii) ongoing employee training;(iv) an independent audit function to test the program; and (v) the implementation of risk-based procedures for conducting initial and ongoing customer due diligence. Each of these five areas will be discussed in turn as well as the obligation for Advisers to file Suspicious Activity Reports (“SARs”) under certain conditions.
Internal Policies, Procedures and Controls. Section 1032.210(b)(1) provides that each Adviser develop and implement internal written policies, procedures and controls that are risk based and reasonably designed to prevent the Adviser from being used for money laundering, terrorist financing, or other illicit finance activities and to achieve and monitor compliance with the applicable provisions of the BSA (as defined in 31 CFR 100(e) and the implementing regulations promulgated thereunder by the Department of the Treasury.[1]The Adviser may deem this requirement satisfied for any: (i) mutual fund; (ii) collective investment fund subject to the requirements of 12 CFR 9.18; (iii) any other Adviser provided such Adviser is subject to an AML/CFT program.
In establishing such internal policies, procedures, and controls, an Adviser is required to review, among other things, the types of advisory services that it provides and the nature of the customers that it advises to identify the Adviser’s vulnerabilities to being used for money laundering, terrorist financing, and other illicit finance activities.It also needs to review investment products offered, investment recommendations, distribution channels, intermediaries that it operates through, and geographic locations of customers and advisory activities.Accordingly, an Adviser’s assessment of the risks presented by the different types of advisory services that it provides to such customers would need to, among other factors, consider the types of accounts offered (e.g. managed accounts), the channels through which such accounts are opened, and the types of customers opening such accounts and related information about such customers, including their geographic location, sources of wealth, and investment objective(s).
Registered Closed-End Funds.FinCEN did not categorically exempt registered closed-end funds[2] so an Adviser’s ALM/CFT program must take these clients into account.But absent indicators of a higher risk, Advisers may treat exchange-listed, closed-end funds as lower risk given that such funds generally (a) do not continuously offer shares or redeem shares on demand; (b) issue a fixed number of shares that trade at negotiated prices over the counter or on an exchange; (c) typically do not have an account relationship with investors; and (d) have shares that are purchased and sold through broker-dealers or banks which are subject to AML/CFT requirements.
Private Funds.The risk for private funds varies by the individual fund’s investment strategy, targeted investors, jurisdiction, and other characteristics.Advisers should consider the minimum subscription amount, restrictions on the type of investors, restrictions on redemptions, and the types of currency transactions conducted with investors.Restrictions on redemptions or withdrawals by itself is not sufficient to determine a private equity fund, for example, is lower risk.Advisers should consider the structure or ownership of the fund.Where an adviser attempts to and is unable to obtain identifying information about the investors in a private fund as part of its risk-based evaluation the Adviser may determine that such fund poses a higher risk for money laundering, for example. The Adviser’s procedures should require reasonable steps to address the higher risk posed, including the collection of sufficient information to monitor and report suspicious activity.
AML/CFT Officer. Section 1032.210(b)(3).[3]Advisers are required to designate a person or persons responsible for implementing and monitoring the operations and internal controls of the AML/CFT program. The AML/CFT Officer needs to be knowledgeable and competent regarding AML/CFT requirements, the Adviser’s relevant internal policies, procedures, and controls, as well as the Adviser’s money laundering, terrorist financing, and other illicit finance risks. The person (or persons) designated as compliance officer need not be an “officer” of the Adviser but should have sufficient independence, access to information, decision-making authority and access to resources to run the program. For an AML/CFT officer to implement a risk-based and reasonably designed program that complies with the requirements of the BSA and FinCEN’s implementing regulations the officer must be qualified with expertise and experience commensurate with the Adviser’s risk profile. The AML/CFT officer’s authority, independence, and access to resources are critical. An AML/CFT officer that has multiple additional job duties or conflicting responsibilities that adversely impact the officer’s ability to effectively coordinate and monitor day-to-day AML/CFT compliance generally would not fulfill this requirement. Also, while much of the AML/CFT program may be delegated, the AML/CFT officer must be an employee of the Adviser or its affiliate.
Independent Testing. Section 1032.210(b)(2) requires Advisers to provide for independent testing[1] of the AML/CFT program by the Adviser’s personnel or a qualified outside party. If the testing is to be done by the Adviser’s personnel they may not be involved in the operation or oversight of the AML/CFT program. The AML/CFT officer or any party who directly, and in some cases, indirectly reports to the AML/CFT officer, or an equivalent role, generally would not be considered sufficiently “independent.”[2] The frequency of the independent testing would depend upon the money laundering, terrorist financing, and other illicit finance risks of the Adviser and the Adviser’s overall risk management strategy. Any individual conducting the testing, whether internal or external, would be required to be independent of the function being tested in the Adviser’s AML/CFT program, including its oversight.
Employee Training. Section 1032.210(b)(4) provides that the Adviser’s program must provide for ongoing training for appropriate persons. Such training may be conducted through, among other things, outside or in-house seminars, and may include computer-based or virtual training. The nature, scope, and frequency of the Adviser’s training program would be determined by the responsibilities of the employees and the extent to which their functions would bring them in contact with AML/CFT requirements or possible money laundering, terrorist financing, or other illicit finance activity. Adviser employees as well as any agent or third-party service provider tasked with administering any aspect of the AML/CFT program must be trained in AML/CFT requirements and to recognize possible signs of money laundering, terrorist financing, and other illicit finance activity that could arise in the course of their duties. Employees should receive general or overall training as well as more specific training tied to their specific job function. Also, employees should receive periodic updates and refreshers regarding the AML/CFT program.
Ongoing Customer Due Diligence. Section 1032.210(b)(5) requires that Advisers implement appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to: (i) understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and (ii) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.[3]The customer risk profile is intended to provide a baseline against which the Adviser can identify aberrant, suspicious transactions. This information may include the customer’s explanation about its initial decision to seek advisory services from the Adviser and may be reflected in the particular type of advisory service the customer seeks, as well as information already collected by the Adviser, such as the customer’s investment objective, net worth, domicile, citizenship, or principal occupation or business. Key risk factors for a natural person customer may include, among other things, the source of funds, the jurisdiction in which the customer resides, the customer’s country or countries of citizenship. and the customer’s status as a politically exposed person.[4]For legal entity customers key risk factors an Adviser may consider include the type of entity, the jurisdiction in which it is domiciled and located, and the statutory and regulatory regime of that jurisdiction with respect to corporate formation and other financial transparency requirements. This rule does not require the categorical collection of beneficial ownership information for legal entity customers. Rather, Advisers should make a risk-based determination as to whether they need to collect beneficial ownership information based on the customer’s risk profile. FinCEN expects Advisers to conduct ongoing monitoring of customers including open-source media searches where a customer claims their funds are derived from a source of wealth that is inconsistent with the Adviser’s understanding of the customer’s financial activities and sources of funds. Advisers should also be aware of a customer’s ties to a jurisdiction, or legal or natural person, that is subject to OFAC sanctions. And Advisers should regularly confirm that the customer is not designated or otherwise been made subject to OFAC sanctions. Advisers need reasonable internal policies, procedures and controls to monitor and identify unusual activity, and adequate resources to identify, report, and monitor suspicious activity.
Delegation. FinCEN will permit Advisers to delegate contractually the implementation and operation of some or all aspects of its AML/CFT program to a third-party provider, including a fund administrator.[1]The Adviser will, however, remain fully responsible and legally liable for, and be required to demonstrate to examiners, the program’s compliance with all requirements. And it would not be sufficient for an Adviser to rely solely on a certification from the service provider that the program is “satisfactory.” A certification would be appropriate as part of the Adviser’s oversight.
Program Approval. Section 1032.210(a)(2) requires that each Adviser’s AML/CFT program be approved in writing by its board of directors or trustees or if it does not have one, by its sole proprietor, general partner, trustee or other person of similar stature such as the CEO, CFO or Chief Legal Officer.[2]
Customer Identification Rule. In a complementary proposed rulemaking (which has not been adopted) the SEC and FinCEN promulgated a Customer Identification Rule (“CID”) that would require Advisers to implement reasonable risk based procedures to identify and verify the identity of their customers to form a reasonable belief that Advisers know the true identity of such customers. There are existing customer identification rules for mutual funds and broker dealers. The lack of a CID rule for Advisers is a major whole in the AML/CFT program for Advisers; unless the CID rule is adopted soon we anticipate that the January 1, 2026 compliance deadline for the Final Rule will be postponed.
Suspicious Activity Reporting. Section 1032.320 details each Advisers’ obligation to file with FinCEN a confidential[3] Suspicious Activity Report or SAR within 30 days[4] of the Adviser’s initial detection of suspicious activity relevant to a possible violation of law or regulation.[5] A transaction requires reporting if it is conducted or attempted by, at, or through an Adviser and involves at least $5,000 and the Adviser suspects or has reason to suspect the transaction or pattern of transactions: (i) involves funds derived from illegal activity or is intended to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade any Federal law or regulation;(ii) is designed to evade the Bank Secrecy Act or any of its regulations; (iii) has no business or apparent lawful purpose; or (iv) involves the use of the Adviser to facilitate criminal activity. The full text of Section 1032.320 is in Exhibit A to this memo.
Examples of activities occurring by, at or through an Adviser include: when an Adviser’s customer provides an instruction to an Adviser for the Adviser to pass on to the custodian (e.g., an instruction to withdraw assets, to liquidate particular securities, or a suggestion that the Adviser purchase certain securities for the customer’s account) or an Adviser instructs a custodian to execute transactions on behalf of its client. An Adviser’s obligation to file a SAR does not extend to activity that is outside the scope of its AML/CFT program.
Some of the types of suspicious activity transactions an Adviser may report are transactions designed to hide the source or destination of funds.Other suspicious activity tied to private funds, particularly venture capital funds, could involve an investor in such a fund requesting access to detailed non-public technical information about a portfolio company as part of an illicit technology transfer.A money launderer could also engage in placement and layering[1] by funding a managed account or investing in a private fund by using multiple wire transfers from different accounts maintained at different financial institutions or requesting that a transaction be processed in a manner to avoid funds being transmitted through certain jurisdictions. Suspicious activity could also include other unusual wire activity that is inconsistent with a customer's stated investment objectives; transferring funds or other assets involving the accounts of third parties with no plausible relationship to the customer, transfers of funds or assets involving suspicious counterparties—such as those subject to adverse media, exhibiting shell company characteristics, or located in jurisdictions with which the customer has no apparent nexus; the customer behaving in a manner that suggests that the customer is acting as a “proxy” to manage the assets of a third party; or an unusual withdrawal request by a customer with ties to activity or individuals subject to U.S sanctions following or shortly prior to news of a potential sanctions listing. Additionally, suspicious activity could include potential fraud and manipulation of customer funds directed by the Adviser. This activity might consist of insider trading, market manipulation, or an unusual wire transfer request by an Adviser from a private fund's account held for the fund's benefit at a qualified custodian.
For foreign-located investment advisers, the SAR filing requirements would apply to advisory activities covered by this rule, which are advisory activities that (i) take place within the U.S., including through involvement of the Adviser’s U.S. personnel, such as the involvement of a branch, or office within the U.S., or (ii) provide advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person. In this case, regardless of whether AML/CFT, administrative, or other advisory services are delegated to a non-U.S. fund administrator by the Adviser, a foreign-located investment adviser would be subject to the SAR filing requirement with respect to activities covered by the Final Rule.
Additionally, private fund Advisers may have limited involvement in and visibility into the operation of their portfolio companies, including “material non-public technical information.” However, there are times when an Adviser may be required to file a SAR on a portfolio company, such as where the Adviser: (i) is approached by an investor in a fund about unusual access to particular technology or processes being developed by a portfolio company, (ii) becomes aware that such an investor has reached out to a portfolio company for such information, or (iii) is asked to obscure participation by an investor in a particular transaction to avoid notification to government authorities; FinCEN would consider such activity to be potentially relevant to a possible violation of law or regulation or indicative of suspicious activity, and an Adviser should consider filing a SAR. The preceding examples are not exhaustive and are provided for illustrative purposes only, and private fund Advisers' determinations to file a SAR should be based on all the facts and circumstances. FinCEN understands Advisers' potentially limited visibility into the portfolios of funds they do not advise (such as funds of funds) and the activities of portfolio companies. FinCEN has clarified the extent of SAR obligations in these contexts. The requirement for reporting of suspicious transactions by, at, or through an Adviser focuses on the activities of the Adviser and the SAR filing obligation does not extend to activities outside the scope of an Adviser's AML/CFT program. This excludes non-advisory activities such as staff of the Adviser occupying management roles at portfolio companies. In addition, Section 1024.320(a)(2) limits the SAR filing obligation to transactions where the Adviser “knows, suspects, or has to reason to suspect” enumerated types of illicit activity. This is an objective standard that focuses on the evidence available to the Adviser in the particular facts and circumstances of a transaction.
FinCEN applies the same standards in existing SAR regulations to broker-dealers and mutual funds.[1]The release adopting the broker-dealer rule states that “this is a flexible standard that adequately takes into account the differences in operating realities among various types of broker-dealers,” some of which, such as clearing brokers, may have less information about their customers.[2]Similarly, FinCEN has issued guidance stating that “mutual funds should be able to meet the `knows, suspects, or has reason to suspect' standard . . . based on information available to the mutual fund that was obtained through the account opening process and in the course of processing transactions, consistent with the mutual fund's required anti-money laundering procedures.”[3]Thus, the standard takes into account both the operational realities of different kinds of financial institutions and the information that they typically collect, including through their AML/CFT procedures.
FinCEN intends the SAR filing requirement to function in a similar way for Advisers. The information that an Adviser has access to depends upon the operational realities of an Adviser in its portion of the market, which includes whether it advises the fund at issue and whether it has portfolio companies over which it exercises significant influence. The standard is not intended to require Advisers to gather additional information beyond what an Adviser in their position would normally possess and what is required by their AML/CFT program. The information such an Adviser would have is based upon the due diligence and other information they obtain as an Adviser.Non-advisory activities—such as having common employees with a portfolio company—are not covered by the SAR filing obligation.
FinCEN emphasizes that this does not mean that Advisers may disregard indications of suspicious transactions by, at, or through the Adviser because they involve funds that the Adviser does not advise (such as funds of funds) or portfolio companies. As FinCEN has stated with regard to mutual funds, even if personnel of another entity are better positioned to file a SAR under certain circumstances, a financial institution remains responsible for meeting its SAR obligations. Thus, if under the relevant facts and circumstances, the Adviser has information causing it to know, suspect, or have to reason to suspect suspicious transactions by, at, or through the Adviser that involve funds it does not advise or portfolio companies, it is required to file a SAR.
Limitation of Liability. Section 1032.320(e) provides protection from liability, a safe harbor, for making required or voluntary reports of suspicious transactions.
Confidentiality of SARs.Section 1032.320(d) makes clear that Advisers must keep even the existence of a SAR or any details in the SAR highly confidential.There are limited exceptions that permit an Adviser to share certain information with regulators and law enforcement.
For the reason set forth in the preamble, FinCEN amends 31 CFR chapter X as follows:
1. The authority citation for part 1010 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307; sec. 701, Pub. L. 114-74, 129 Stat. 599; sec. 6403, Pub. L. 116-283, 134 Stat. 3388.
2. Section 1010.100 is amended by:
a. Removing the word “or” at the end of paragraph (t)(9);
b. Removing the period at the end of paragraph (t)(10), and adding in its place “; or”; and
c. Adding paragraphs (t)(11) and (nnn).
The additions read as follows:
General definitions.
* * * * *
(t) * * *
(11) An investment adviser.
* * * * *
(nnn) Investment adviser. (1) Any person, other than a person identified in (ii), wherever located, who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(a)), or any person who is exempt from SEC registration under section 203(l) or 203(m) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(l), (m)).
(2) For the purposes of this subpart, investment adviser does not include:
(i) any person who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(a)) only because such person is an investment adviser that meets the conditions of (a) mid-sized adviser, as set forth in Section 203A(a)(2)(B) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3a(a)(2)(B)), (b) a pension consultant, as defined under 17 CFR 275-203A-2(a), or (c) multi-state adviser, as defined under 17 CFR 275-203A-2(d).
(ii) any person who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(a)) and does not report any assets under management, as defined under Section 203A(a)(3) of the Act (15 U.S.C. 80b-3a(a)(3)), on its most recently filed initial Form ADV or annual updating amendment to Form ADV (17 CFR 279.1).
3. Section 1010.410[1] is amended by:
a. Removing the word “or” at the end of paragraph (e)(6)(i)(I);
b. Removing the word “and” at the end of paragraph (e)(6)(i)(J) and adding in its place “or”; and
c. Adding paragraph (e)(6)(i)(K).
The addition reads as follows:
Records to be made and retained by financial institutions.
* * * * *
(e) * * *
(6) * * *
(i) * * *
(K) An investment adviser; and
* * * * *
4. Section 1010.605[2] is amended by:
a. Removing the word “and” at the end of paragraph (c)(2)(iii);
b. Removing the period at the end of paragraph (c)(2)(iv) and adding in its place “; and”;
c. Adding paragraph (c)(2)(v);
d. Removing the word “and” at the end of paragraph (e)(1)(iii);
e. Adding the word “and” at the end of paragraph (e)(1)(iv); and
f. Adding paragraph (e)(1)(v).
The additions read as follows:
Definitions.
* * * * *
(c) * * *
(2) * * *
(v) As applied to investment advisers (as set forth in paragraph (e)(1)(v) of this section) means any contractual or other business relationship established between a person and an investment adviser to provide advisory services.
* * * * *
(e) * * *
(1) * * *
(v) An investment adviser except that an investment adviser shall not be considered a covered financial institution for the purposes of § 1010.230.[3]
* * * * *
5. Section 1010.810 is amended by revising paragraph (b)(6) to read as follows:
Enforcement.
* * * * *
(b) * * *
(6) To the Securities and Exchange Commission with respect to brokers and dealers in securities, investment advisers, and investment companies as that term is defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1et seq.);
* * * * *
6. Add part 1032 to read as follows:
Definitions.
Foreign-located investment adviser.
Scope of application to foreign-located investment advisers.
Severability
General.
Anti-money laundering/countering the financing of terrorism programs for investment advisers.
[Reserved]
General.
Reports of transactions in currency.
Filing obligations.
Identification required.
Aggregation.
Structured transactions.
Exemptions.
Reports by investment advisers of suspicious transactions.
General.
Recordkeeping.
General.
Special information-sharing procedures to deter money laundering and terrorist activity for investment advisers.
[Reserved]
Voluntary information-sharing among financial institutions.
General.
Due diligence programs for correspondent accounts for foreign financial institutions.
Due diligence programs for private banking accounts.
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307.
Definitions.
Refer to § 1010.100 of this chapter for general definitions not noted in this part.
Foreign-located investment adviser.
A foreign-located investment adviser is an investment adviser whose principal office and place of business is outside the United States.
Scope of application to foreign-located investment advisers.
(a) The requirements of this part 1032 apply to a foreign-located investment adviser only with respect to its advisory activities that:
(1) Take place within the United States, including through involvement of U.S. personnel of the investment adviser, such as the involvement of an agency, branch, or office within the United States, or
(2) Provide advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person.
(3) For purposes of this § 1032.111,
(i) “Foreign-located private fund” means any foreign-located issuer that is a private fund as that term is defined under 15 U.S.C. 80b-2(a)(29);
(ii) “Investor” means any investor as that term is defined at 17 CFR 275.202(a)(30)-1(c)(2); and
(iii) “U.S. person” means any U.S. person as that term is defined in 17 CFR 230.902(k).
(b) For avoidance of doubt, upon request, a foreign-located investment adviser shall make records and reports required under this part, and any other records it has retained regarding the scope of its activities covered by this part, available for inspection by FinCEN or the Securities and Exchange Commission.
Severability
If any provision of this part, or any provision of §§ 1010.100, 1010.410, 1010.605, or 1010.810 of this chapter referencing investment advisers, is held to be invalid, or the application thereof to any person or circumstance is held to be invalid, such invalidity shall not affect other provisions, or application of such provisions to other persons or circumstances, that can be given effect without the invalid provision or application.
General.
Investment advisers are subject to the program requirements set forth and cross-referenced in this subpart. Investment advisers should also refer to subpart B of part 1010 of this chapter for program requirements contained in that subpart that apply to investment advisers.
Anti-money laundering/countering the financing of terrorism programs for investment advisers.
(a) Anti-money laundering/countering the financing of terrorism program requirements for investment advisers. (1) Each investment adviser shall develop and implement a written anti-money laundering/countering the financing of terrorism (AML/CFT) program that is risk-based and reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing, or other illicit finance activities and to achieve and monitor compliance with the applicable provisions of the Bank Secrecy Act (as defined in 31 CFR 1010.100(e)) and the implementing regulations promulgated thereunder by the Department of the Treasury. The investment adviser may deem the requirements in this subpart satisfied for any:
(i) Mutual fund (as defined in 31 CFR 1010.100(gg)),
(ii) Collective investment fund that is subject to the requirements of 12 CFR 9.18 (or other applicable law that incorporates the requirements of 12 CFR 9.18), or
(iii) Any other investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that such mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to an AML/CFT program requirement under this chapter.[4]
(2) Each investment adviser's AML/CFT program must be approved in writing by its board of directors or trustees, or if it does not have one, by its sole proprietor, general partner, trustee, or other persons that have functions similar to a board of directors. An investment adviser shall make its anti-money laundering/countering the financing of terrorism program available for inspection by FinCEN or the Securities and Exchange Commission.
(b) Minimum requirements. The AML/CFT program shall at a minimum:
(1) Establish and implement internal policies, procedures, and controls reasonably designed to prevent the investment adviser from being used for money laundering, terrorist financing, or other illicit finance activities and to achieve compliance with the applicable provisions of the Bank Secrecy Act and implementing regulations in this chapter;
(2) Provide for independent testing for compliance to be conducted by the investment adviser's personnel or by a qualified outside party;
(3) Designate a person or persons responsible for implementing and monitoring the operations and internal controls of the program;
(4) Provide ongoing training for appropriate persons; and
(5) Implement appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and
(ii) Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.
(c) Effective date. An investment adviser must develop and implement an AML/CFT program that complies with the requirements of this section on or before January 1, 2026.
[Reserved]
General.
(a) Investment advisers are subject to the reporting requirements set forth and cross-referenced in this subpart. Investment advisers should also refer to subpart C of part 1010 of this chapter for reporting requirements contained in that subpart that apply to investment advisers. The investment adviser may deem the requirements in this subpart satisfied for any: (i) mutual fund (as defined in 31 CFR 1010.100(gg)), (ii) collective investment fund that is subject to the requirements of 12 CFR 9.18 (or other applicable law that incorporates the requirements of 12 CFR 9.18), or (iii) any other investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that such mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to reporting requirements under this chapter.
Reports of transactions in currency.
The reports of transactions in currency requirements for investment advisers are located in subpart C of part 1010 of this chapter and this subpart.
Filing obligations.
Refer to § 1010.311 of this chapter for reports of transactions in currency filing obligations for investment advisers.
Identification required.
Refer to § 1010.312 of this chapter for identification requirements for reports of transactions in currency filed by investment advisers.
Aggregation.
Refer to § 1010.313 of this chapter for reports of transactions in currency aggregation requirements for investment advisers.
Structured transactions.
Refer to § 1010.314 of this chapter for rules regarding structured transactions for investment advisers.
Exemptions.
Refer to § 1010.315 of this chapter for exemptions from the obligation to file reports of transactions in currency for investment advisers.
Reports by investment advisers of suspicious transactions.
(a) General. (1) Every investment adviser shall file with FinCEN, to the extent and in the manner required by this section, a report of any suspicious transaction relevant to a possible violation of law or regulation. An investment adviser may also file with FinCEN a report of any suspicious transaction that it believes is relevant to the possible violation of any law or regulation, but whose reporting is not required by this section. Filing a report of a suspicious transaction does not relieve an investment adviser from the responsibility of complying with any other reporting requirements imposed by the Advisers Act or the Securities and Exchange Commission.
(2) A transaction requires reporting under this section if it is conducted or attempted by, at, or through an investment adviser; it involves or aggregates funds or other assets of at least $5,000; and the investment adviser knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part):
(i) Involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation;
(ii) Is designed, whether through structuring or other means, to evade any requirements of this chapter or any other regulations promulgated under the Bank Secrecy Act;
(iii) Has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the investment adviser knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or
(iv) Involves use of the investment adviser to facilitate criminal activity.
(3) More than one investment adviser may have an obligation to report the same transaction under this section, and other financial institutions may have separate obligations to report suspicious activity with respect to the same transaction pursuant to other provisions of this chapter. In those instances, no more than one report is required to be filed by the investment adviser(s) and other financial institution(s) involved in the transaction, provided that the report filed contains all relevant facts, including the name of each financial institution and the words “joint filing” in the narrative section, and each institution maintains a copy of the report filed, along with any supporting documentation.
(b) Filing and notification procedures —(1) What to file. A suspicious transaction shall be reported by completing a Suspicious Activity Report (“SAR”) and collecting and maintaining supporting documentation as required by paragraph (c) of this section.
(2) Where to file. The SAR shall be filed with FinCEN in accordance with the instructions to the SAR.
(3) When to file. A SAR shall be filed no later than 30 calendar days after the date of the initial detection by the reporting investment adviser of facts that may constitute a basis for filing a SAR under this section. If no suspect is identified on the date of such initial detection, an investment adviser may delay filing a SAR for an additional 30 calendar days to identify a suspect, but in no case shall reporting be delayed more than 60 calendar days after the date of such initial detection.
(4) Mandatory notification to law enforcement. In situations involving violations that require immediate attention, such as suspected terrorist financing or ongoing money laundering schemes, an investment adviser shall immediately notify by telephone an appropriate law enforcement authority in addition to filing timely a SAR.
(5) Voluntary notification to the Financial Crimes Enforcement Network or the Securities and Exchange Commission. Investment advisers wishing to voluntarily report suspicious transactions that may relate to terrorist activity may call the Financial Crimes Enforcement Network's Financial Institutions Hotline at 1-866-556-3974 in addition to filing timely a SAR if required by this section. The investment adviser may also, but is not required to, contact the Securities and Exchange Commission to report in such situations.
(c) Retention of records. An investment adviser shall maintain a copy of any SAR filed by the investment adviser or on its behalf (including joint reports), and the original (or business record equivalent) of any supporting documentation concerning any SAR that it files (or that is filed on its behalf) for a period of five years from the date of filing the SAR. Supporting documentation shall be identified as such and maintained by the investment adviser, and shall be deemed to have been filed with the SAR. An investment adviser shall make all supporting documentation available to FinCEN or any Federal, State, or local law enforcement agency, or any Federal regulatory authority that examines the investment adviser for compliance with the Bank Secrecy Act, upon request.
(d) Confidentiality of SARs. A SAR, and any information that would reveal the existence of a SAR, are confidential and shall not be disclosed except as authorized in this paragraph (d). For purposes of this paragraph (d) only, a SAR shall include any suspicious activity report filed with FinCEN pursuant to any regulation in this chapter.
(1) Prohibition on disclosures by investment advisers —(i) General rule. No investment adviser, and no current or former director, officer, employee, or agent of any investment adviser, shall disclose a SAR or any information that would reveal the existence of a SAR. Any investment adviser, and any current or former director, officer, employee, or agent of any investment adviser that is subpoenaed or otherwise requested to disclose a SAR or any information that would reveal the existence of a SAR shall decline to produce the SAR or such information, citing this section and 31 U.S.C. 5318(g)(2)(A)(i), and shall notify FinCEN of any such request and the response thereto.
(ii) Rules of construction. Provided that no person involved in any reported suspicious transaction is notified that the transaction has been reported, this paragraph (d)(1) shall not be construed as prohibiting:
(A) The disclosure by an investment adviser, or any current or former director, officer, employee, or agent of an investment adviser of:
( 1) A SAR, or any information that would reveal the existence of a SAR, to FinCEN or any Federal, State, or local law enforcement agency, or any Federal regulatory authority that examines the investment adviser for compliance with the Bank Secrecy Act; or
( 2) The underlying facts, transactions, and documents upon which a SAR is based, including but not limited to, disclosures:
( i) To another financial institution, or any current or former director, officer, employee, or agent of a financial institution, for the preparation of a joint SAR; or
( ii) In connection with certain employment references or termination notices, to the full extent authorized in 31 U.S.C. 5318(g)(2)(B); or
(B) The sharing by an investment adviser, or any current or former director, officer, employee, or agent of the investment adviser, of a SAR, or any information that would reveal the existence of a SAR, within the investment adviser's corporate organizational structure for purposes consistent with Title II of the Bank Secrecy Act as determined by regulation or in guidance.
(2) Prohibition on disclosures by government authorities. A Federal, State, local, territorial, or Tribal government authority, or any current or former director, officer, employee, or agent of any of the foregoing, shall not disclose a SAR, or any information that would reveal the existence of a SAR, except as necessary to fulfill official duties consistent with Title II of the Bank Secrecy Act. For purposes of this section, “official duties” shall not include the disclosure of a SAR, or any information that would reveal the existence of a SAR, in response to a request for disclosure of non-public information or a request for use in a private legal proceeding, including a request pursuant to 31 CFR 1.11.
(e) Limitation on liability. An investment adviser, and any current or former director, officer, employee, or agent of any investment adviser, that makes a voluntary disclosure of any possible violation of law or regulation to a government agency or makes a disclosure pursuant to this section or any other authority, including a disclosure made jointly with another institution, shall be protected from liability to any person for any such disclosure, or for failure to provide notice of such disclosure to any person identified in the disclosure, or both, to the full extent provided by 31 U.S.C. 5318(g)(3).
(f) Compliance. Investment advisers shall be examined by FinCEN or its delegates for compliance with this section. Failure to satisfy the requirements of this section may be a violation of the Bank Secrecy Act and of this chapter.
Subpart D—Records Required To Be Maintained by Investment Advisers
General.
Investment advisers are subject to the recordkeeping requirements set forth and cross referenced in this subpart. Investment advisers should also refer to subpart D of part 1010 of this chapter for recordkeeping requirements contained in that subpart which apply to investment advisers. The investment adviser may deem the requirements in this subpart satisfied for any: (i) mutual fund (as defined in 31 CFR 1010.100(gg)), (ii) collective investment fund that is subject to the requirements of 12 CFR 9.18 (or other applicable law that incorporates the requirements of 12 CFR 9.18), or (iii) any other investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that such mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to recordkeeping requirements under this chapter.
Recordkeeping.
For regulations regarding recordkeeping, refer to § 1010.410 of this chapter.
Subpart E—Special Information-Sharing Procedures To Deter Money Laundering and Terrorist Activity
General.
Investment advisers are subject to the special information-sharing procedures[5] to deter money laundering and terrorist activity requirements set forth and cross-referenced in this subpart. Investment advisers should also refer to subpart E of part 1010 of this chapter for special information-sharing procedures to deter money laundering and terrorist activity contained in that subpart which apply to investment advisers. The investment adviser may deem the requirements in this subpart satisfied for any: (i) mutual fund (as defined in 31 CFR 1010.100(gg)), (ii) collective investment fund that is subject to the requirements of 12 CFR 9.18 (or other applicable law that incorporates the requirements of 12 CFR 9.18), or (iii) any other investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that such mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to special information sharing procedures under this chapter.
Special information-sharing procedures to deter money laundering and terrorist activity for investment advisers.
For regulations regarding special information-sharing procedures to deter money laundering and terrorist activity for investment advisers, refer to § 1010.520 of this chapter.
[Reserved]
Voluntary information-sharing among financial institutions.
For regulations regarding voluntary information-sharing among financial institutions, refer to § 1010.540 of this chapter.
Subpart F—Special Standards of Diligence, and Special Measures for Investment Advisers
General.
Investment advisers are subject to the special standards of diligence, prohibitions, and special measures requirements set forth and cross referenced in this subpart. Investment advisers should also refer to subpart F of part 1010 of this chapter for special standards of diligence, prohibitions, and special measures contained in that subpart, all of which apply to investment advisers. The investment adviser may deem the requirements in this subpart satisfied for any: (i) mutual fund (as defined in 31 CFR 1010.100(gg)), (ii) collective investment fund that is subject to the requirements of 12 CFR 9.18 (or other applicable law that incorporates the requirements of 12 CFR 9.18), or (iii) any other investment adviser (as defined in 31 CFR 1010.100(nnn)), provided that such mutual fund, collective investment fund, or other investment adviser is advised by the investment adviser and subject to special standards of diligence and special measures under this chapter.
Due diligence programs for correspondent accounts for foreign financial institutions.
For regulations regarding due diligence programs for correspondent accounts for foreign financial institutions, refer to § 1010.610 of this chapter.
Due diligence programs for private banking accounts.
For regulations regarding due diligence programs for private banking accounts, refer to § 1010.620 of this chapter.
[1] The amendments are to 31 CFR Parts 1010 and 1032 and are referred to herein as the “Final Rule.”
[2] Excluded from the requirements of the BSA are state registered investment advisers, foreign private advisers and family offices. See Release p. 72177-8.Since mutual funds have their own AML/CFT program requirements they too are excluded from the requirements of an Advisers AML/CFT program.This exclusion is not mandatory. See Release p. 72182.
[3]89 Federal Register 12108 (Feb. 15, 2024) at 12115 describing how Jynwel Capital Limited laundered $150m stolen from the Malaysian government and introduced the funds into the U.S. through an SEC registered Adviser, Electrum Group, LLC.
[4] See Release p. 72206
[5] The Risk assessment [p. 15] identifies four main categories of illicit finance activity involving certain Advisers. First, Advisers have served as an entry point into the U.S. for illicit proceeds from foreign corruption, fraud, and tax evasion. Second, Advisers manage billions of dollars controlled by sanctioned entities including Russian oligarchs who help facilitate Russia’s illegal war against Ukraine. Third, Advisers and their private funds are being used by foreign states, including China and Russia, to access certain technology with long-term national security implications through investments in early-stage companies. Fourth, Advisers have stolen client assets, including through fraud.
[6] See Release p. 72180-1 and 72202.
[7] See Release footnotes 192 and 193 and related text.
[8] See Release footnote 265 and related text.
[9] See Release p. 72168.
[10] Foreign-located investment adviser is defined in Section 1032.110 and the scope of such an adviser’s obligations is set forth in Section 1032.111.See Release p. 72171-72177.
[11] See Release p. 72181.Mutual funds and collective investment funds are discussed on page 72182-72183. Investment advisers are discussed on page 72184.
[12] See Release p. 72189.
[13] See Release p. 72190-72192.
[14] See Release footnote 220 and related text.
[15] See Release p. 72192.
[16] See Release p. 72192.
[17] See Release footnote 221.
[18] See Release p. 72193
[19] See Release footnote 229.
[20] See Release p. 72187-72189 including a discussion permitting Advisers to delegate to foreign located service providers.
[21] See Release p. 72197.
[22] See SAR Sharing And Confidentiality at Release p. 72202.
[23] See Filing And Notification Procedures at Release p. 72201; Advisers are required to maintain copies of SARs and supporting documentation for five years; see Release p. 72202
[24] See Release p. 72198.
[25] Generally, money laundering involves three stages, known as placement, layering, and integration. At the “placement” stage, proceeds from illegal activity or funds intended to promote illegal activity are first introduced into the financial system. The “layering” stage involves the distancing of illegal proceeds from their criminal source through a series of financial transactions to obfuscate and complicate their traceability. “Integration” occurs when illegal proceeds previously placed into the financial system are made to appear to have been derived from a legitimate source.See Release footnote 46.
[26] See Release footnote 246.
[27] See Release footnote 247.
[28] See Release footnote 248.
[29] Section 1010.410(e) and (f) are referred to as the Currency Transaction Reports (“CTR”), Recordkeeping and Travel Rules.See Release p. 72179. For the text of 31 CFR Section 1010.410 see here.
[30] Section 1010.605 is amended to include investment advisers in the definition of “covered financial institution.”This Rule does not require the categorical collection of beneficial ownership information for legal entity customers of investment advisers.See Release p. 72194. For the test of 31 CFR 1010.605 see here.
[31] Section 1010.230 outlines beneficial ownership requirements for legal entity customers which applies to broker-dealers and mutual funds. For the text see here.
[32] As applied to subadvisors, this exclusion will permit an investment adviser (acting as subadviser) to exclude from its AML/CFT program another investment adviser (the primary adviser) to which it provides subadvisory services where the subadviser has a direct contractual relationship with the primary adviser and not with the underlying customer of that primary adviser. See Release p. 72184.
[33] See Release p. 72204. Sections 1032.500, 1032.520, and 1032.540 expressly subject Advisers to FinCEN's rules implementing the special information-sharing procedures to detect money laundering or terrorist activity of sections 314(a) and 314(b) of the USA PATRIOT Act. These provisions generally require an Adviser, upon request from FinCEN, to expeditiously search its records for specified information to determine whether the Adviser maintains or has maintained any account for, or has engaged in any transaction with, an individual, entity, or organization named in FinCEN's request. An Adviser is then required to report any such identified information to FinCEN. Further, Advisers are able to participate in voluntary section 314(b) information sharing arrangements, through which they would be able to gather additional information from other financial institutions.